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<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> jan-01-1998
<PERIOD-END> Dec-31-1998
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 107,227
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<TOTAL-INVEST> 128,640
<CASH> 2,431
<RECOVER-REINSURE> 16,073
<DEFERRED-ACQUISITION> 20,209
<TOTAL-ASSETS> 216,291
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105,971
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<UNDERWRITING-OTHER> 14,172
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</TABLE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission file number: 1-9580
AMWEST INSURANCE GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-2672141
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5230 Las Virgenes Road
Calabasas, California 91302
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 871-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
Common Stock, $.01 par value American Stock Exchange, Inc.
Stock Purchase Rights Pacific Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( ).
Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X)
As of March 26, 1999, 3,922,886 shares of common stock, $.01 par value, were
outstanding. As of March 26, 1999, the market value of the voting stock held by
non-affiliates of the registrant, based on the closing sales price of the
registrant's common stock as reported by the American Stock Exchange, Inc. on
such date, was $25,192,134.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for the 1998 Annual
Meeting of stockholders (incorporated by reference under Part III).
<PAGE>
TABLE OF CONTENTS
PART I
Item Page
1. Business 1
General 1
Products 2
Underwriting and Collateral 4
Statutory Net Premiums Written to
Statutory Policyholders' Surplus Ratio 6
Combined Ratios 7
Reinsurance 7
Reserves 8
Investments 13
Marketing and Growth 16
The Safety Association 17
Competition 17
Employees 17
Government Regulation 18
2. Properties 18
3. Legal Proceedings 19
4. Submission of Matters to a Vote of Security Holders 19
PART II
5. Market for Registrant's Common Equity and
Related Stockholder Matters 20
Market Information 20
Holders 20
Dividends 20
6. Selected Financial Data 21
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 23
Results of Operations 23
Liquidity and Capital Resources 26
Market Risk 27
Other Matters 28
8. Financial Statements and Supplementary Data 31
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 31
PART III
10. Directors and Executive Officers of the Registrant 32
11. Executive Compensation 32
12. Security Ownership of Certain Beneficial Owners
and Management 32
13. Certain Relationships and Related Transactions 32
PART IV
14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 33
i
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Amwest Insurance Group, Inc., a Delaware corporation ("the Company"), is an
insurance holding company engaged, through its wholly-owned subsidiaries, Amwest
Surety Insurance Company ("Amwest Surety"), Condor Insurance Company ("Condor")
and Far West Insurance Company ("Far West") in underwriting surety bonds
nationwide, commercial automobile insurance in the state of California and, to a
lesser extent, other property and casualty coverages in various parts of the
United States. Surety bonds are predominately written through 30 branch and
field offices located throughout the United States. Both the surety and property
and casualty products are marketed through independent agents with a small
percentage of the Company's business written directly to the insured.
The Company's surety division underwrites a wide variety of surety bonds for
small to mid-sized surety accounts through independent agents and brokers.
Currently, the Company has the capacity to write bonds up to $25 million. In
order to protect the Company from major losses on the larger accounts, the
Company purchases reinsurance from a consortium of Treasury listed reinsurers.
Bonds are underwritten using a variety of factors to help mitigate risk,
including the acceptance of full or partial collateral and the usage of funds
control where appropriate. See "Reinsurance" and "Business -Underwriting and
Collateral."
According to A.M. Best Company ("Best"), an insurance company rating and
statistical service, property and casualty insurance companies wrote
approximately $2.9 billion in surety net premiums in 1997. The Company ranked
10th nationally when measured by gross premiums written for all companies
writing surety in 1997. In California, which currently is the largest market for
surety business and where the Company has historically generated a significant
portion of its business, the Company ranked 3rd when measured by gross premiums
written for all companies writing surety in 1997.
The Company's property and casualty division primarily writes insurance
packages which consist principally of commercial automobile liability and
physical damage and, to a lesser extent, general liability and other related
coverages for insureds involved in general trucking including solid waste
disposal, sand and gravel, transit mix, logging, farm to market, intermodal
trucking, less than total load (LTL), newspaper distribution, tow truck and
limousine services industries. In addition to its commercial policies, the
Company offers non-standard private passenger automobile insurance in the states
of California and Arizona and homeowners coverage in the states of California,
Florida and Hawaii and motorcycle insurance in the state of New York.
The Company was incorporated in California on August 19, 1970 and
redomesticated in Delaware on September 11, 1987. The Company's insurance
subsidiaries, Amwest Surety, Condor and Far West, are domiciled in Nebraska.
Accordingly, the Company is registered with the Nebraska Department of Insurance
as an insurance holding company. Amwest Surety is licensed in all 50 states, the
District of Columbia, Guam and Puerto Rico, Far West is licensed in 45 states
and the District of Columbia and Condor is licensed in California, Arizona,
Idaho, Montana, Nebraska, Nevada and Oregon. Amwest Surety and Far West hold
certificates of authority from the United States Department of the Treasury,
which qualifies them as acceptable sureties on Federal bonds. Amwest Surety and
Far West are rated (a group rating) "A-" (Excellent) by Best and Condor is rated
"B" (Adequate).
<PAGE>
The term "the Company" unless the context otherwise requires, refers to
Amwest Insurance Group, Inc. and its insurance subsidiaries. The principal
executive offices of the Company are located at 5230 Las Virgenes Road,
Calabasas, California 91302. The Company's telephone number is (818) 871-2000
and its facsimile number is (818) 871-2019.
PRODUCTS
The Company's major products are:
Contract performance bonds, which guarantee the performance of specific
contractual obligations between the principal and the obligee and/or payments to
labor and material suppliers. Included within this product are contract
performance bonds which are partially guaranteed by the Small Business
Administration ("SBA").
Commercial Surety bonds, which includes all non-contract surety bonds
including numerous types of license and permit, miscellaneous and judicial bonds
for which the Company is primarily liable.
Court bonds, which guarantee that the principal will adequately discharge
the obligations set by a court. These bonds principally consist of bail and
immigration bonds for which the agent is generally primarily liable.
Specialty Property and Casualty, which includes commercial auto liability
and physical damage, general liability, non-standard personal auto, homeowners
and other related property and casualty coverages.
The following tables show, for the periods indicated, the premiums written,
net premiums earned, losses and loss adjustment expenses and loss ratios for the
Company's four major product lines:
<PAGE>
<TABLE>
<CAPTION>
PREMIUMS WRITTEN
Years ended December 31,
1998 1997 1996
(Dollars in thousands)
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Type of Insurance
Contract performance bonds $ 62,293 46.9% $ 54,808 50.7% $49,782 51.2%
Commercial Surety bonds 27,662 20.8 16,694 15.4 11,192 11.5
Court bonds 12,315 9.3 11,109 10.3 11,196 11.5
------------- ------------- ------------- ------------- ------------- -------------
Total Surety 102,270 77.0 82,611 76.4 72,170 74.2
Specialty Property & Casualty
insurance 30,549 23.0 25,480 23.6 25,072 25.8
------------- ------------- ------------- ------------- ------------- -------------
Total $132,819 100.0% $ 108,091 100.0% $ 97,242 100.0%
============= ============= ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
NET PREMIUMS EARNED
Years ended December 31,
1998 1997 1996
(Dollars in thousands)
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Type of Insurance
Contract performance bonds $ 52,491 49.5% $ 46,741 50.7% $46,158 52.5%
Commercial Surety bonds 20,233 19.1 12,786 13.9 8,446 9.6
Court bonds 11,442 10.8 11,038 12.0 10,897 12.4
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
Total Surety 84,166 79.4 70,565 76.6 65,501 74.5
Specialty Property & Casualty
insurance 21,805 20.6 21,585 23.4 22,382 25.5
------------- ------------- ------------- ------------- ------------- -------------
Total $105,971 100.0% $ 92,150 100.0% $87,883 100.0%
============= ============= ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
LOSSES & LOSS ADJUSTMENT EXPENSES AND LOSS RATIOS
Years ended December 31,
1998 1997 1996
(Dollars in thousands)
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Type of Insurance
Contract performance bonds $ 17,447 33.2% $ 15,738 33.7% $24,430 52.9%
Commercial Surety bonds 5,485 27.1 2,873 22.5 2,571 30.4
Court bonds 330 2.9 1,402 12.7 835 7.7
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
Total Surety 23,262 27.6 20,013 28.4 27,836 42.5
Specialty Property & Casualty
insurance 17,569 80.6 14,644 67.8 18,811 84.1
------------- ------------- ------------- ------------- ------------- -------------
Total $ 40,831 38.5% $ 34,657 37.6% $46,647 53.1%
============= ============= ============= ============= ============= =============
</TABLE>
<PAGE>
UNDERWRITING AND COLLATERAL
For the contract and commercial surety lines of business, the Company
individually analyzes the risk associated with each application it receives,
except for selected categories of miscellaneous bonds. This underwriting
evaluation includes verifying the credit history and financial resources of the
applicant.
The Company maintains control of the contract and commercial surety
underwriting process through the use of authority limits for each underwriter,
through committee underwriting of larger risks and through a system of limited
delegation. Substantially all risks are underwritten utilizing indemnity
agreements which may be personal, corporate or both. Such agreements indemnify
the Company from losses on surety bonds and are an integral part of the
underwriting process. Additionally, the Company may require collateral on
contract bonds and, occasionally, other types of bonds based upon an assessment
of the risk characteristics. The risk assessment includes evaluation of the
financial strength of the contractor, the credit history of the contractor, work
in progress and successful work experience. Collateral can consist of
irrevocable letters of credit, certificates of deposit, cash, savings accounts,
publicly traded securities and trust deeds or mortgages on real property. The
principal form of collateral accepted by the Company currently consists of
irrevocable letters of credit and certificates of deposit. Total collateral held
as of December 31, 1998 had a value of approximately $240,452,000. Trust deeds
and mortgages on real property held as collateral are not reflected in this
figure due to the inexact nature of their disposition values. The Company
reflects in its consolidated financial statements only funds received as
collateral on which net earnings inure to the benefit of the Company. This
amounted to $22,092,000 at December 31, 1998. Recent reductions in total
collateral reflect competitive market conditions.
The underwriting process for the court line of business consists of two
separate approaches, one for the wholesale agent written business and another
for the retail direct business. The underwriting procedures are as follows:
Wholesale Underwriting Procedures - The Company contracts with retail agents
and, through this contract, the agents are provided with underwriting authority
levels ranging from a low of about $20,000 to a maximum of $125,000 together
with powers of attorney. Underwriting authority levels are agreed to by the
agents in writing. Court division regional managers and home office management
set the underwriting levels based upon a number of factors. These factors
include the agent's experience, track record, and most importantly, the amount
of agent collateral that the Company holds pursuant to the indemnification
provisions of the agent contract. Should an agent wish to write a bond that is
in excess of his underwriting authority level, he is required to contact the
Company for approval. The Company then reviews the collateral with the agent to
determine whether or not the collateral is sufficient. Each of the court
division's underwriting staff have been assigned underwriting authority levels.
Bonds in excess of staff underwriting authority levels must be approved by
management. Generally, the Company requires the agent to obtain full collateral,
except in those cases where the agent has a very large amount of contract
collateral on deposit with the Company and/or the agent has been in the business
for a long period of time. The Company maintains an underwriting approval record
in the bond files for each approval. The Company periodically reviews an agent's
adherence to these policies through on-site agent reviews or audits.
Once an agent executes a bond, he reports the execution to the Company along
with payment. Powers are replaced in an amount equal to those which have been
reported in order to assure a complete reporting of all bonds executed.
<PAGE>
<PAGE>
Retail Underwriting Procedures - The Company's retail offices are staffed
with court bond underwriters. The retail branch manager has set underwriting
authority levels for each of the underwriters. The retail branch managers'
underwriting authority level is established by court division home office
management. Any bond over the underwriter's underwriting authority level must be
approved by the branch manager. Any bond over the branch manager's underwriting
authority level must be approved by court division home office management, in
writing. Full collateral is generally required, however, on smaller bonds
($2,500 or less), underwriters may approve a bond with little collateral if the
indemnitors appear to be strong. This evaluation is based upon a TRW credit
report and/or employment stability.
The retail offices are supplied with powers of attorney from the home
office. These powers are in turn supplied to non-liable agents who post the
bonds. Agents are re-supplied with powers on an as-needed basis. Powers for the
retail offices are replaced in an amount equal to those which have been reported
in order to assure a complete reporting of all bonds executed.
For the specialty property and casualty lines of business, the Company sets
insurance premium rates for various risk classifications based upon its
historical loss experience and industry averages. The Company's rates and
classifications are established using actuarial computations prepared by its
actuarial consultant and are reviewed on a semi-annual basis and adjusted
periodically. The information used by the Company in its actuarial evaluations
includes complete historical claim information related to its experience as an
insurance company and industry data. The Company's insurance premium rates are
subject to rate regulation, which varies by state.
Insurance applications are evaluated and a decision to write a particular
risk at a specific premium is made by the Company's underwriting department. The
Company's policy is to have its underwriting personnel or third party
administrator for the assigned risk business individually review each risk. The
underwriting department or third party administrator determines whether to write
a particular risk after evaluating a number of factors based upon detailed
objective underwriting standards contained in the underwriting standards manual.
These factors include the type and value of the property to be insured, the
location and management of operations conducted by the insured, the experience
and claim history of the insured and, with respect to vehicle coverage, the
driving records of the vehicle operators. When a determination has been made
that an applicant represents an appropriate risk, the Company offers coverage on
a monthly or annual basis.
Many of the Company's specialty property and casualty coverages are offered
in Group Business Package policies. Package policies include fire and allied
lines, commercial inland marine, general liability, commercial automobile
liability, physical damage and surety. The commercial automobile liability
portion of the package policy provides bodily injury and property damage
liability. Property damage liability has a mandatory deductible which applies to
property damage liability coverage. Also, uninsured/underinsured motorist
coverage, medical payments coverage, and comprehensive and collision coverages
are offered. The general liability portion of the Group Business Package covers
bodily injury and property damage liability written on an occurrence basis. The
policy contains customary extensions of coverage. All Group Business Package
policies contain absolute pollution liability exclusion. Limited pollution
coverage is provided only to the extent required by the U.S. Department of
Transportation ("DOT") regulatory requirements, which generally require minimum
liability policy limits of $750,000 to cover environmental restoration on claims
for insureds who travel interstate or on federal property.
<PAGE>
STATUTORY NET PREMIUMS WRITTEN TO STATUTORY POLICYHOLDERS' SURPLUS RATIO
This ratio reflects the leverage of the Company's current volume of net
business in relation to its policyholders' surplus. There are no legal
requirements governing this ratio, but guidelines established by the National
Association of Insurance Commissioners ("NAIC") have historically provided that
the ratio should not exceed 3.0 to 1. In addition, the guidelines can vary
according to the lines of business written. The following table shows, for the
years indicated, the insurance subsidiaries' consolidated ratios:
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996 1995 1994
(Dollars in thousands)
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statutory net premiums written $107,961 $100,034 $89,325 $82,814 $84,093
Statutory policyholders' surplus 48,600 44,312 40,298 45,361 40,467
Ratio 2.22 2.26 2.22 1.83 2.08
</TABLE>
In December 1993, the NAIC adopted a Risk-Based Capital ("RBC") Model Law
for property and casualty companies. The RBC Model Law is intended to provide
standards for calculating a variable regulatory capital requirement related to a
company's current operations and its risk exposures (asset risk, underwriting
risk, credit risk and off-balance sheet risk). These standards are intended to
serve as a diagnostic solvency tool for regulators that establishes uniform
capital levels and specific authority levels for regulatory intervention when an
insurer falls below minimum capital levels. The Model Law specifies four
distinct action levels at which a regulator can intervene with increasing
degrees of authority over a domestic insurer as its financial condition
deteriorates. These RBC levels are based on the percentage of an insurer's
surplus to its calculated RBC.
A company's RBC is required to be disclosed in its statutory annual
statement. The RBC is not intended to be used as a rating or ranking tool nor is
it to be used in premium rate making or approval. The Company has calculated
it's RBC requirements as of December 31, 1998 and found that it exceeded the
highest level of recommended capital requirement.
The Company's insurance subsidiaries currently prepare their statutory
financial statements in accordance with accounting practices prescribed or
permitted by the various state insurance departments. Prescribed statutory
accounting practices include a variety of publications of the NAIC, as well as
state laws, regulations and general administrative rules. Permitted statutory
accounting practices encompass all accounting practices not so prescribed. The
NAIC membership adopted in March 1998, the Codification of Statutory Accounting
Principles Project as the NAIC supported basis of accounting, the result of
which is expected to constitute the only source of "prescribed" statutory
accounting practices. The Codification Project, which will become effective on
January 1, 1999, was approved with the provision for commissioner discretion in
the determination of appropriate statutory accounting for insurers. Such
discretion will continue to allow prescribed or permitted accounting practices
that may differ from state to state. Accordingly, this project will change the
definition of what comprises prescribed versus permitted statutory accounting
practices and may result in changes to the accounting policies that insurance
enterprises use to prepare their statutory financial statements. The Company has
not determined how implementation will affect its statutory financial statements
and is unable to predict how insurance rating agencies will interpret or react
to such changes. No assurance can be given that future legislative or regulatory
changes from such activities will not adversely affect the Company.
<PAGE>
COMBINED RATIOS
The GAAP combined ratio is the sum of (1) the ratio of losses and loss
adjustment expenses incurred (including a provision for incurred but not
reported losses) to net premiums earned (the "loss ratio") and (2) the ratio of
policy acquisition and general operating costs to net premiums earned (the
"expense ratio").
The following table shows the loss ratios, expense ratios and combined
ratios of the Company as derived from data prepared in accordance with generally
accepted accounting principles. Generally, if the combined ratio is below 100%
an insurance company has an underwriting profit; if it is above 100% the company
has an underwriting loss.
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996 1995 1994
------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Loss Ratio 38.5% 37.6% 53.1% 41.4% 35.4%
Expense Ratio 61.6 62.9 58.1 62.9 62.4
------------- ------------- -------------- ------------- -------------
Combined Ratio 100.1% 100.5% 111.2% 104.3% 97.8%
============= ============= ============== ============= =============
</TABLE>
REINSURANCE
A reinsurance transaction occurs when an insurance company remits or "cedes"
a portion of the premium to a reinsurer as payment for the reinsurer's
assumption of a portion of the risk. Reinsurance does not legally discharge the
insurer from its primary liability for the full amount of the policies, and the
ceding company must pay the loss if the assuming company fails to meet its
obligations under the reinsurance agreement. The Company evaluates and monitors
the financial condition of its reinsurers in order to minimize its exposure to
significant losses from reinsurer insolvencies.
The Company purchases reinsurance for protection against liabilities in
excess of certain limits. The Company imposes stricter underwriting standards
with respect to bonds with penal amounts in excess of reinsured limits.
On the surety lines of business, the Company's subsidiaries maintain an
excess of loss reinsurance treaty with a group of reinsurers (the "Excess
Treaty"). The Excess Treaty may be canceled at the election of either party by
providing notice of cancellation 90 days prior to any anniversary (currently
October 1), however, the reinsurers would remain liable for covered losses
incurred up to the cancellation date. The amended Excess Treaty limits the
Company's exposure on any one principal (the person or entity for whose account
the surety contract is made, and whose debt or obligation is the subject of the
surety contract) to the first $2,000,000 of loss and to losses in excess of
$20,000,000 for losses incurred prior to October 1, 1998 and $25,000,000 for
losses incurred thereafter. Coverage is provided for most types of bonds which
the Company writes except SBA guaranteed bonds, which are not covered by the
treaty. The reinsurers' maximum exposure under the Excess Treaty is $26,000,000
of losses discovered during any one contract period (October 1 to October 1) for
the 1997-1998 contract year and $35,000,000 for the 1998-1999 contract year. The
Excess treaty also contains profit sharing provisions for the $4,000,000 excess
of $2,000,000 layer of the treaty, of which no amounts are currently accrued
based on experience of the treaty through December 31, 1998.
<PAGE>
The Company, effective January 1, 1997, entered into an aggregate stop-loss
treaty with Underwriters Reinsurance Company (Barbados), Inc. which treaty was
renewed for the 1998 accident year. This contract has a limit of approximately
$7,000,000 of losses and loss adjustment expenses incurred for the 1998 accident
year. On the surety lines of business when losses and loss adjustment expenses
exceed 32.8% of net earned premiums and for all other lines when losses and loss
adjustment expenses exceed 67% of net earned premiums the reinsurer becomes
liable for losses. The Company has an option to increase the coverage by up to
$5,000,000 by payment of $1,000,000 prior to the incurrance of $2,500,000 in
ceded losses under the original treaty. At December 31, 1998 and 1997, the
Company ceded $2,533,000 and $0, respectively, in losses to the stop-loss
treaty.
The Company's insurance subsidiaries also issue contract bonds under the SBA
Surety Guarantee Program. Industry practice is to account for SBA guarantees as
reinsurance transactions. The purpose of the SBA Surety Guarantee Program is to
assist small contractors, who have not established credit or who fail to meet a
surety's normal underwriting standards, in obtaining bonds. An SBA guarantee
covers between 80% and 90% of the surety's liability up to $1,250,000 per bond.
The Company also purchased a quota share reinsurance treaty with
Underwriters Reinsurance Company, a New Hampshire domiciled reinsurer which was
effective July 1, 1998. This treaty cedes 15% of net surety written premium for
all surety written through Amwest Surety Insurance Company on a pro rata basis.
For its liability lines of business, the Company has reduced its exposure on
any one risk with the purchase of excess of loss reinsurance. The net retained
amount has varied by year, primarily based on the Company's surplus position.
Currently, the Company retains the first $400,000 on any one risk with the next
$600,000 ceded to a consortium of reinsurers led by Gerling Global Reinsurance
Corporation. From July 1, 1997 to June 30, 1998 the Company participated in this
treaty with a 10% share. The Company further reinsures $1,000,000 in excess of
$1,000,000 for its liability coverages including extra contractual obligations
and excess of policy limits exposures. The Company is also a party to a quota
share agreement with regards to its non-standard private passenger automobile
business. Under this agreement, the Company cedes 50% of its net liability on
all non-standard private passenger automobile coverages.
For its commercial automobile property coverages, the Company generally
retains the first $200,000 on any one exposure and purchases excess of loss
reinsurance for $4,800,000 in excess of $200,000. Limits relating to its
Hawaiian homeowners, California homeowners and Florida homeowners programs
differ from the above. For Hawaiian homeowners, the Company participates in the
Hawaii Hurricane Relief Fund, and accordingly, its Hawaiian policies exclude
wind coverage over 75 miles per hour. For California homeowners, the Company is
party to a 75% quota share reinsurance agreement with a limit of $7,500,000 per
occurrence. For Florida homeowners, the Company is a party to a 75% quota share
reinsurance agreement with a limit of 200% of the actual gross premiums written
in any policy year. Additionally, the Company participates in the Florida
Hurricane Catastrophe Fund as a 90% participant. Recoveries from this Fund are
limited to hurricanes and are based on a formula which utilizes, among other
factors, premiums written, industry premiums written, industry losses and
amounts available in the fund.
RESERVES
The Company maintains reserves for losses and loss adjustment expenses with
respect to both reported and unreported claims. The amount of loss reserves for
reported claims, including related loss adjustment expense reserves, is
generally based upon a case-by-case evaluation of the type of loss. In
evaluating reserves for surety losses and loss adjustment expenses, the Company
considers a number of factors including an estimate of the costs to complete the
<PAGE>
project, outstanding obligations to subcontractors, suppliers and the like and
prevailing case law and regulations pertaining to the underlying exposures. The
Company also considers the financial strength of the principal, estimated
offsets to the claimed amount, such as collateral, contract funds and indemnity
agreements, and defenses available to the principal and the Company. The Company
may use outside attorneys and construction consultants throughout the reserving
process. The Company establishes expense reserves to cover the anticipated
expenses incurred by its outside consultants and attorneys. All reserves for
reported claims are net of anticipated collateral and other non-reinsurance
recoveries. Reserves for incurred but not reported claims are based on Company
experience. An amount is included in the reserves for unallocated loss
adjustment expenses consisting of the costs for the Company's claims, legal and
subrogation departments to settle claims incurred prior to year end.
The loss settlement period on most of the Company's insurance claims is
relatively short. Nevertheless, it is often necessary to adjust estimates of
liability on a claim either upward or downward between the time a claim is
reported and the time of payment. There are inherent uncertainties in estimating
reserves, therefore, actual losses and loss adjusting expenses may deviate,
perhaps substantially, from reserves on the accompanying consolidated financial
statements, which could have a material adverse effect on the Company's
financial condition and results of operations. The Company does not discount its
claim reserves for financial reporting purposes. While the Company may make
implicit provisions for inflation or increasing costs in establishing reserves
for known claims, the relatively short claim to payment period and the nature of
the insured losses makes provisions for inflation or increasing costs generally
unnecessary.
The following table sets forth a reconciliation of the statutory liability
for losses and loss adjustment expenses (1) for the periods shown:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
(Dollars in thousands)
-----------------------------------------
<S> <C> <C> <C>
Statutory liability for losses and loss adjustment expenses at
beginning of year $33,338 $35,876 $24,246
Provision for losses and loss adjustment expenses occurring in current
year 43,420 35,212 45,853
Increase (decrease) in estimated losses and loss adjustment expenses
for claims occurring in prior years (2,589) (555) 794
------------- ------------- -------------
40,831 34,657 46,647
------------- ------------- -------------
Losses and loss adjustment expense payments for claims occurring during:
Current year (24,992) (15,095) (21,638)
Prior years (16,770) (22,100) (13,379)
------------- ------------- -------------
(41,762) (37,195) (35,017)
------------- ------------- -------------
Statutory liability for losses and loss adjustment expenses at end of
year $32,407 $33,338 $35,876
============= ============= =============
<FN>
(1) Amounts reflect the liability for losses and loss adjustment
expenses net of reinsurance recoverable on unpaid loss and
loss adjustment expenses.
</FN>
</TABLE>
The increase or decrease in estimated losses and loss adjustment expenses
for losses occurring in prior years reflects the net effect of the resolution of
losses for other than full reserve value and subsequent readjustment of loss
values as of December 31st of the applicable years.
<PAGE>
The surety loss and loss adjustment expense ratios remained constant at 28%
for 1997 and 1998. The 1998 ratio includes the impact of the excess of loss and
the aggregate stop loss reinsurance treaties. During 1998 $4,168,000 was ceded
in premiums on these treaties with $4,100,000 ceded in losses. In 1997
$2,987,000 was ceded in premiums with no losses ceded to the reinsurers.
Competitive market conditions and the Company's ability to write surety
bonds for larger contractors has resulted, on many bonds, in the substitution of
indemnity agreements for liquid and non-liquid collateral. The Company, through
its ongoing reserve analysis, has estimated the benefit to be derived from such
agreements and reduced estimates of ultimate losses incurred accordingly. In the
fourth quarter of 1998, the Company increased its estimate of such "salvage and
subrogation" recoveries by approximately $5.4 million which is partially
attributable to salvage and subrogation on losses incurred during the fourth
quarter. The increase relates primarily to the 1998 and 1997 years and reflects
the Company's belief that the underlying data is maturing. Further, subsequent
collection efforts have proven prior estimates to be conservative. Since the
Company had also pierced it's aggregate excess contract in the fourth quarter,
the net benefit attributable to the increased "salvage and subrogation" estimate
was approximately $1,025,000.
The difference between the reserves reported in the Company's consolidated
financial statements prepared in accordance with generally accepted accounting
principles ("GAAP") and those reported in the annual statements filed with the
State Departments of Insurance in accordance with statutory accounting
principles ("SAP") is as follows:
December 31,
1998 1997 1996
(Dollars in thousands)
--------------------------------------
Reserves reported on a SAP basis $32,407 $33,338 $35,876
Net reinsurance recoverable on
unpaid loss and loss adjustment expenses 9,837 6,185 6,133
------------- ------------ -----------
Reserves reported on a GAAP basis $42,244 $39,523 $42,009
============= ============ ===========
In accordance with Financial Accounting Standards Board Statement No. 113,
Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts, reinsurance recoverable on unpaid losses and loss adjustment expenses
are reported for generally accepted accounting practices as assets rather than
netted against the corresponding liability for such items on the balance sheet.
Since these recoverable balances are netted against the losses and loss
adjustment expense liability for statutory purposes, a SAP/GAAP difference
results.
The table on page 12 discloses the cumulative development of unpaid losses
and loss adjustment expenses of the Company from 1988 through 1998. The top line
of this table depicts the estimated net liability for unpaid losses and loss
adjustment expenses recorded at the balance sheet date for each of the indicated
years. This liability represents the estimated net amount of losses and loss
adjustment expenses for claims arising in all prior years that are unpaid at the
balance sheet date, including losses that had been incurred but not reported to
the Company. The lower portion of the table shows the re-estimated amount of the
previously recorded net liability based on experience as of the end of each
succeeding year. Estimated gross liability and the re-estimated amount of
previously recorded gross liability for the five years ended December 31, 1998
are shown below the table.
<PAGE>
The Company attempts to estimate reserves that are adequate and neither
deficient nor redundant. Therefore, no meaningful evaluation of estimated future
redundancies or deficiencies can be developed from the Company's prior
experience. The cumulative "redundancy/(deficiency)" shown in the table on page
12 represents the aggregate change in the estimates over prior years. For
example, the 1992 liability has developed a $6,086,000 redundancy over five
years. That amount has been reflected in income over the five years. The effect
on income for the past three years of changes in estimates of the liabilities
for losses and loss adjustment expenses is shown in the reconciliation table on
page 9. The cumulative redundancy (deficiency) as of the end of any year is due
to a re-evaluation of reserves established in prior years at less than or more
than the reserved values as of that date.
<PAGE>
<TABLE>
<CAPTION>
CUMULATIVE LOSS DEVELOPMENT
December 31,
(Dollars in thousands)
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net liability for
losses & loss
adjustment expenses $3,528 $13,169 $23,199 $23,269 $24,860 $28,641 $26,584 $24,246 $35,876 $33,338 $32,407
Net paid (cumulative)
as of:
One year later 4,000 5,426 9,892 9,826 11,224 15,862 18,318 13,379 22,100 16,770 -
Two years later 4,021 8,146 14,386 14,473 16,896 23,547 24,579 22,934 28,301
Three years later 3,915 9,301 17,057 16,464 18,576 26,659 28,010 24,256
Four years later 3,693 10,996 18,261 16,654 18,902 27,303 27,446
Five years later 3,723 11,642 17,976 16,795 18,962 27,089
Six years later 4,519 11,646 18,074 16,838 18,618
Seven years later 4,425 11,583 18,227 16,463
Eight years later 4,318 11,434 17,965
Nine years later 4,291 11,455
Ten years later 4,314
Net liability
re-estimated as of:
One year later 5,513 12,247 20,580 20,560 21,937 26,860 26,343 25,040 35,322 30,749 -
Two years later 4,650 10,463 18,890 18,401 19,565 25,943 28,540 26,237 33,998
Three years later 3,809 11,071 18,871 17,810 18,695 27,699 28,415 26,141
Four years later 4,020 11,622 18,654 16,664 19,048 26,914 28,675
Five years later 4,050 11,706 17,982 16,784 18,720 27,273
Six years later 4,483 11,628 17,943 16,589 18,774
Seven years later 4,429 11,542 17,994 16,565
Eight years later 4,319 11,204 18,005
Nine years later 4,301 11,483
Ten years later 4,330
Net Reserve Redundancy
(Deficiency): ($802) $1,686 $5,194 $6,704 $6,086 $1,368 ($2,091) ($1,895) $1,878 $2,589 -
===========================================================================================================
Net redundancy
(deficiency) as a
percent of original (23%) 13% 22% 29% 24% 5% (8%) (8%) 5% 8% -
net liability:
===========================================================================================================
Gross liability for losses and loss adjustment expenses 46,614 34,653 31,915 42,009 39,523 43,004
Ceded liability for losses and loss adjustment expenses (17,973) (8,069) (7,669) (6,133) (6,185) (10,597)
-------------------------------------------------------------
Net liability for losses and loss adjustment expenses 28,641 26,584 24,246 35,876 33,338 32,407
=============================================================
Gross liability re-estimated 39,878 38,492 31,861 39,870 37,278
Ceded liability re-estimated (12,605) (9,817) (5,720) (6,492) (6,529)
----------------------------------------------------
Net liability re-estimated 27,273 28,675 26,141 33,998 30,749
====================================================
Gross Reserve Redundancy (Deficiency) 6,736 (3,839) 54 2,139 2,245
====================================================
<FN>
Note 1: The Company allocates salvage and subrogation recoverable
balances by calendar year based on its best estimate of the years for which the
accrued salvage and subrogation relates.
</FN>
</TABLE>
<PAGE>
INVESTMENTS
The Company's primary investment objectives are the protection and long-term
enhancement of surplus, flexibility to respond to changing business conditions
and the maximization of after-tax total return consistent with the Company's
business objectives. The Company has investment management agreements with two
firms to manage a significant part of the Company's investment portfolio. The
Company pays each investment manager a quarterly fee based on the market value
of the portfolio managed. The Company's arrangement with each investment manager
is terminable by either party on 60 days prior notice. With respect to each of
the investment mangers, investment guidelines have been established. These
guidelines establish limits for maturity risk, quality risk and diversification
risk. Guidelines are also established for investment grades, issue size and
effective portfolio duration.
Certain states or territories require the Company to deposit securities
issued by such states or territories as a condition of licenser. These
securities are managed in-house in accordance with guidelines established by the
various states and territories. At December 31, 1998, the market value of all
state deposits was approximately $14,170,000.
<PAGE>
The following table sets forth the composition of the Company's investment
portfolio at the dates indicated:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996 1995 1994
(Dollars in thousands)
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fixed maturities, held-to-maturity, at amortized
cost:
Bonds:
U.S. Government $ - $ - $ - $ - $ 10,850
Mortgage backed securities - - - - 696
States, municipalities and political subdivisions
- - - - 3,524
Certificates of deposit, at cost - - - - 50
------------- ------------- ------------- ------------- -------------
Total - - - - 15,120
------------- ------------- ------------- ------------- -------------
Fixed maturities, available-for-sale, at market
(1):
Bonds:
U.S. Government 12,411 11,289 13,739 32,101 14,292
Asset backed securities 2,349 3,342 4,004 5,636 -
Mortgage backed securities 23,070 17,754 24,245 17,723 27,904
States, municipalities and political subdivisions
37,329 27,845 26,608 34,952 34,374
Other 29,413 34,612 27,848 20,284 22,080
Redeemable preferred stock, at market (1) 2,655 3,904 6,050 6,495 8,280
------------- ------------- ------------- ------------- -------------
Total 107,227 98,746 102,494 117,191 106,930
------------- ------------- ------------- ------------- -------------
Total fixed maturities 107,227 98,746 102,494 117,191 122,050
Common equity securities, at market (1) 10,572 10,297 9,779 8,689 7,386
Preferred equity securities, at market (1) 4,265 2,894 4,253 3,592 2,321
Other invested assets 4,375 6,455 2,849 797 -
Short-term investments, at cost 2,201 2,281 890 745 2,289
------------- ------------- ------------- ------------- -------------
Total investments 128,640 120,673 120,265 131,014 134,047
Interest bearing cash equivalents (2) 2,431 3,807 6,434 5,232 4,032
------------- ------------- ------------- ------------- -------------
Total investments and cash equivalents $131,071 $124,480 $126,699 $136,246 $138,079
============= ============= ============= ============= =============
<FN>
(1) Market value is principally determined by quotations on national
securities exchanges. When national securities exchange quotes are not
available, quotations are determined by the Company's investment advisors.
(2) These amounts represent gross invested bank balances.
</FN>
</TABLE>
<PAGE>
During the fourth quarter of 1995 the Company concluded that it would no
longer commit to holding any security to maturity, as this limited management
from responding to changes in circumstances and perceived economic trends and it
would no longer participate in the active trading of any portion of its
portfolio. Accordingly, all invested amounts have been classified at December
31, 1998, 1997 and 1996 as available for sale.
The Company's investment results, pre-tax investment yields and effective
yields for the periods indicated were as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996 1995 1994
Investment Results: (Dollars in thousands)
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average invested assets (includes short-term
investments) $127,776 $125,590 $131,473 $137,162 $138,195
Net investment income 6,651 6,396 6,807 7,863 7,337
Average annual yield on investments:
Fixed maturities 5.86% 5.88% 5.83% 6.15% 5.93%
Equity securities 4.90 3.95 3.11 4.53 2.32
Short-term investments 4.31 3.49 4.93 8.21 4.78
------------ ------------- ------------ ------------ -------------
Effective yield total investments 5.51 5.40 5.44 6.10 5.65
Less investment expense (0.31) (0.31) (0.26) (0.37) (0.34)
============ ============= ============ ============ =============
Total investment yield 5.21% 5.09% 5.18% 5.73% 5.31%
============ ============= ============ ============ =============
Average annual return on investments (1) 7.5% 10.10% 6.14% 14.01% (0.72%)
============ ============= ============ ============ =============
<FN>
(1) Average annual return is net investment income, realized gains (losses)
and the change in unrealized gains (losses) divided by
average invested assets.
</FN>
</TABLE>
The amortized cost and estimated market value of fixed maturities at
December 31, 1998, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Prepayment assumptions for asset backed and mortgage backed securities are
obtained from broker dealer survey values or internal estimates. These
assumptions are consistent with the current interest rate and economic
environment.
Amortized Cost Estimated
Market Value
Fixed maturities due: (Dollars in thousands)
----------------------------------
Within 1 year $ 6,492 $ 6,519
Beyond 1 year but within 5 years 35,139 35,882
Beyond 5 years but within 10 years 35,064 35,234
Beyond 10 years but within 20 years 14,416 14,896
Beyond 20 years 14,244 14,696
---------------- -----------------
$105,355 $107,227
================ =================
<PAGE>
MARKETING AND GROWTH
The Company markets its surety bond products in 50 states, the District of
Columbia, Guam, Puerto Rico, the U.S. Virgin Islands, Argentina and the Marshall
Islands through approximately 9,000 independent agents and brokers. California
constituted 23.3% and 23.4% of surety premiums written for the years ended
December 31, 1998 and 1997, respectively.
The Company's contract performance and commercial surety bonds are
distributed through a network of 30 branch and field offices located in major
metropolitan areas throughout the United States. Each branch office has a
defined territory which it serves, primarily working with those independent
agents specializing in writing surety bonds. While the branch offices
occasionally write business directly with the customer, the Company does not
actively seek such business.
The Company's distribution methodology results in a relatively high
distribution cost system inasmuch as the Company must maintain a cadre of
professionals in each branch location as well as pay competitive commissions to
the agents it serves. The Company believes, however, that the higher costs of
maintaining a local presence in each market it serves are essential to produce
acceptable loss characteristics for the surety bonds it underwrites. The
Company's experience has shown that it is important to have experienced
underwriting professionals in the markets it serves. This results in more
construction site, contractor and agent direct contact that would be possible if
the business were underwritten from a remote location. The Company believes that
this direct interface is essential to consistently produce profitable
underwriting results.
The higher distribution cost system does present opportunities for the
Company as well. Generally, branches become more efficient in servicing the
business it underwrites at larger premium volumes. Accordingly, for the Company
to achieve maximum profitability from its branch network, each branch must write
a certain minimum amount of premium. This amount varies by market primarily
based on cost characteristics of the geographic area. Further, any increases to
the minimum premium generally result in increased efficiency. The Company has
therefore geared its strategy to grow the surety business to take advantage of
the cost dynamics of its branch system.
Wholesale court bonds are produced by contracting directly with retail
agents. The court division also contracts with general agents who in turn
contract with retail agents. In both scenarios, the agents are fully liable for
all losses generated on bonds they underwrite. Amwest Surety markets for
contracted agents by advertising in trade publications and by personally
marketing to agents in their offices. Personal marketing efforts are primarily
handled by the regional managers.
The Company markets its retail court bonds in the states of Washington,
Idaho, New Mexico, Utah and Hawaii under the name "Allwest General Bail Bond
Agency". The business is developed primarily through yellow page advertising.
The Company utilizes a large number of independent contractor non-liable agents
to post the bonds it writes.
The Company directs its specialty property and casualty marketing efforts
primarily at independent insurance producers. At December 31, 1998, the total
number of producers placing specialty property and casualty coverage was
approximately 250. Such producers are made aware of the coverages offered by
Condor primarily through direct mailing and advertisements in trade publications
and trade shows.
<PAGE>
THE SAFETY ASSOCIATION
The Company offers its monthly commercial automobile insurance policies to
members of the Waste Industry Loss Prevention and Safety Association (d.b.a.
"The Safety Association"). The Safety Association was formed in 1981 to enhance
the availability of insurance for and provide services aimed at improving
operational safety to the industries to which Condor provides insurance.
Effective June 30, 1998, the Company purchased the Safety Association and merged
its operations into Condor. The Safety Association employs five field safety
specialists who are responsible for inspecting members' fleets and facilities
and providing safety engineering and loss prevention advice and aids to members,
including videos and bi-monthly newsletters. The Company believes that the
activities of the field safety specialists enhance loss prevention and risk
experience. The acquisition of The Safety Association was not material to the
consolidated financial statements of the Company.
COMPETITION
The insurance industry is a highly competitive industry. There are numerous
firms, particularly in the specialty markets, which compete for a limited volume
of business. Competition is based upon price, service, products offered and
financial strength of the insurance company. There are a number of companies in
the industry which offer packages and policies similar to the Company's.
The largest surety company in the country has less than six percent of the
total surety market. The top ten companies collectively have less than half of
the total market. The industry is growing at an annual rate of only about three
percent which has intensified competition.
The Company competes for surety business in the middle market. The Company's
capacity enables the Company to underwrite specialty surety credit which is
dominated by small, regional companies as well as business marketed by
professional surety agents who are generally sought after by standard market
companies. Local service, pricing and, to some extent, agent commissions are the
primary competitive tools. The Company, while competitive in pricing and
commissions, believes that service is the difference. To this end, the Company
believes its branch network and its decentralized approach to doing business
will enable it to continue to compete effectively, even when challenged by the
larger standard market companies.
The Company's strategy for its specialty property and casualty business
generally is to position itself within a limited regional geographic location as
a consistent and reliable provider of commercial insurance packages for insureds
involved in specialized industries.
The Company believes that its monthly direct-bill commercial policies create
a competitive advantage because the insured is not required to finance an annual
premium. Additionally, the Company believes that its ability to provide a
consistent insurance package for specialized industries and to continue to
provide quality service in the handling of claims through staff who are
particularly experienced in the areas of the Company's specialization permit it
to compete successfully in its targeted customer base. The Company's direct
billing also enable insurance producers to enjoy the benefits of a monthly
commission without incurring the cost of billing and the attendant problems
relating to premium collection.
EMPLOYEES
At December 31, 1998, the Company employed 518 people.
<PAGE>
GOVERNMENT REGULATION
The Company's insurance subsidiaries are domesticated in the state of
Nebraska. Accordingly, the Company is regulated by the Nebraska Department of
Insurance as an insurance holding company. Any person who acquires or agrees to
acquire an amount of the Company's Common Stock which would cause him to own
beneficially more than 10% of such stock must obtain the prior approval of the
Nebraska Insurance Commissioner.
The Company's insurance subsidiaries are required to file with the
Department of Insurance in their state of domicile information concerning
ownership, financial condition, capital structure and general business
operations. The Company's insurance subsidiaries can only conduct business in
states in which they are licensed. Each of the insurance subsidiaries are
subject to varying degrees of regulation and supervision in the states in which
they conduct business. This regulation relates to such matters as the adequacy
of reserves, the type and quality of investments, minimum capital and surplus
requirements, risk-based capital requirements, deposit of securities with state
insurance authorities for the benefit of policyholders, restrictions on
dividends and other transfers, periodic examination of the insurers' affairs,
claims handling procedures, and annual and other reports required to be filed
with the state insurance commissioners on the financial and other condition of
these companies. The subsidiaries must also file rates with most of the states
in which they are licensed to underwrite insurance.
The Company's insurance subsidiaries are also subject to triennial
examinations of their financial condition by their state of domicile. Condor was
last examined by the State of California as of December 31, 1995. The California
examiners decreased policyholder surplus of Condor as of December 31, 1995 by
$1,600,000 for reserve development that occurred during 1996. Amwest Surety and
Far West were examined by the State of Nebraska as of December 31, 1996.
Amwest Surety and Far West are also regulated by the United States
Department of the Treasury as acceptable sureties for Federal bonds.
The Company participates in the Hawaii Hurricane Relief Fund, and
accordingly, its Hawaiian policies exclude wind coverage over 75 miles per hour.
Additionally, the Company participates in the Florida Hurricane Catastrophe Fund
as a 90% participant. Recoveries from this Fund are limited to hurricanes and
are based on a formula which utilizes, among other factors, premiums written,
industry premiums written, industry losses and amounts available in the fund. As
a participant, the Company could be assessed in the event the above Funds
sustain hurricane losses.
The Company is a participant in California's "assigned risk" program as it
relates to commercial automobile liability insurance. Automobile liability
insurers in California are required to sell bodily injury liability to a
proportionate number (based on the insurer's share of the California automobile
casualty insurance market) of those drivers applying to the California
Department of Insurance for placement as assigned risks. Drivers seek placement
as assigned risks because their driving records or other relevant
characteristics make them difficult to insure in the open market.
ITEM 2. PROPERTIES
The Company leases all of its office space which, as of December 31, 1998,
totaled approximately 166,000 square feet. The home office aggregates
approximately 63,000 square feet. Branch locations range from 1,000 to 4,600
square feet. See Note 12 of Notes to Consolidated Financial Statements.
<PAGE>
On January 26, 1996, the Company entered into a lease agreement for home
office space in the City of Calabasas. The Company moved to this location in
June 1997. The lease term is for a period of 15 years and covers approximately
63,000 square feet. The Company also has the option to purchase this home office
building and land commencing on April 27, 2000 and extending for a six month
period at a predetermined rate for the building, with the value of land based on
then existing market rates.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time named as a defendant in various lawsuits
incidental to its business. While the outcome of lawsuits and other proceedings
cannot be predicted with certainty, management expects these matters will not
have a materially adverse effect on the consolidated financial position or
results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
The Company's Common Stock has been traded on the American Stock Exchange
under the symbol AMW since June 25, 1987 and on the Pacific Stock Exchange under
the symbol AMW since April 21, 1988. The following table sets forth, for the
periods indicated, the high and low sale prices per share as reported on the
American Stock Exchange. This table also sets forth the amount per share of cash
dividends paid by the Company with respect to its Common Stock for each of the
indicated periods.
Period High Low Dividends
1996 (1)
First Quarter 14 12 1/4 .10
Second Quarter 12 5/8 10 5/8 .10
Third Quarter 11 3/8 10 1/2 .10
Fourth Quarter 12 1/2 10 1/4 .10
1997 (1)
First Quarter 12 3/8 10 5/8 .10
Second Quarter 13 5/8 10 5/8 .10
Third Quarter 15 3/8 13 1/2 .10
Fourth Quarter 14 3/4 12 1/2 .10
1998
First Quarter 15 13 1/4 .10
Second Quarter 16 7/8 14 5/8 .10
Third Quarter 14 1/2 13 1/4 .10
Fourth Quarter 14 1/2 13 .10
(1) Amounts reflect a 10% stock dividend effective March 31, 1998.
On March 26, 1999, the closing price of the Company's Common Stock on the
American Stock Exchange was $11.00 per share.
HOLDERS
As of March 26, 1999, there were 321 holders of record of the Company's
Common Stock. However, based on available information, the Company believes that
the total number of stockholders, including beneficial stockholders, exceeds
1,000.
DIVIDENDS
The Company began paying cash dividends in 1986. The Company's ability to
pay cash dividends is subject to certain regulatory and contractual
restrictions. See Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and Capital Resources" and Notes 8
and 10 of Notes to Consolidated Financial Statements.
<PAGE>
In addition to regulatory and contractual restrictions, the payment, amount
and timing of future dividends by the Company will depend upon the Company's
operating results, overall financial condition, capital requirements and general
business condition, as well as other factors deemed relevant by the Board of
Directors.
ITEM 6. SELECTED FINANCIAL DATA
The selected data presented on page 20 under the captions "Summary of
Earnings," "Year End Financial Position" and "Operating Ratios" for, and as of
the end of, each of the years in the five year period ended December 31, 1998,
are derived from the consolidated financial statements of Amwest Insurance
Group, Inc. and subsidiaries, which financial statements have been audited by
KPMG LLP, independent certified public accountants. The consolidated financial
statements as of December 31, 1998 and 1997 and for each of the years in the
three year period ended December 31, 1998 and the report thereon, are included
elsewhere in this Annual Report on Form 10-K.
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
Year ended December 31,
1998 1997 1996 1995 1994
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Earnings:
Net premiums earned $ 105,971 $ 92,150 $ 87,883 $ 85,170 $ 81,289
Underwriting expenses 106,093 92,618 97,710 88,847 79,537
Underwriting income (loss) (122) (468) (9,827) (3,677) 1,752
Net investment income 6,651 6,396 6,807 7,863 7,337
Realized gains 4,400 3,473 2,201 2,176 65
Income (loss) before income taxes 9,012 7,435 (5,046) 4,498 6,393
Provision (benefit) for income taxes 2,743 1,937 (2,360) 829 1,352
Net income (loss) $ 6,269 $ 5,498 $ (2,686) $ 3,669 $ 5,041
===============================================================================
Per share (1):
Basic $ 1.62 $ 1.48 $ (.74) $ 1.01 $ 1.39
===============================================================================
Diluted $ 1.59 $ 1.46 $ (.74) $ .99 $ 1.37
===============================================================================
Cash dividends $ 0.40 $ 0.44 $ 0.44 $ 0.40 $ 0.36
===============================================================================
Year End Financial Position:
Total investments $128,640 $ 120,673 $120,265 $131,014 134,047
Total assets 216,291 190,519 181,418 183,833 186,863
Bank indebtedness 14,500 14,500 12,500 12,500 12,500
Total stockholders' equity 61,902 57,179 49,932 55,075 46,157
Average stockholders' equity 59,541 53,558 52,504 50,616 47,252
Return on stockholders' equity 10.53% 10.27% (5.12%) 7.25% 10.67%
Operating Ratios:
Loss & loss adjustment expenses 38.53% 37.61% 53.08% 41.41% 35.35%
Policy acquisition costs 48.21% 49.22% 43.66% 44.70% 45.03%
General operating expenses 13.37% 13.68% 14.45% 16.80% 19.21%
Other operating expenses - - - 2.35% -
Combined ratios 100.11% 100.53% 111.18% 105.25% 99.60%
<FN>
(1) Amounts reflect a 10% stock dividend effective March 31, 1998.
</FN>
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Year ended December 31, 1998 compared to year ended December 31, 1997
Gross premiums written increased 23% from $108,091,000 in 1997 to
$132,819,000 in 1998. Premium growth for the surety division was 24%, with the
commercial surety product showing the largest growth, up 66% from $16,694,000 in
1997 to $27,662,000 in 1998. Management believes that this growth is
attributable to continued emphasis on this product and a strengthening of our
servicing and underwriting capabilities for commercial surety during 1998. In
addition, the Company's bail product grew 11% from $11,109,000 in 1997 to
$12,315,000 in 1998 due primarily to increased penetration of this product in
Missouri, Oklahoma and Texas. Contract surety premiums grew 14% from $54,808,000
in 1997 to $62,293,000 in 1998. Of this amount, 8% was the product of
acquisitions completed during late 1997 and 6% was internally generated.
Property and Casualty Division premiums grew 20% primarily due to the
implementation of the Division's California non-standard automobile program and
specialty motorcycle program in New York State.
Net premiums earned increased 15% from $92,150,000 in 1997 to $105,971,000
in 1998. The increase in net premiums earned reflects the increased premium
writings partially offset by increased premiums ceded as a result of changes in
the Company's reinsurance program during 1998.
Net losses and loss adjustment expenses increased 18% from $34,657,000 in
1997 to $40,831,000 in 1998. This resulted in a slight increase in the loss and
loss adjustment expense ratio from 37.6% in 1997 to 38.5% in 1998. The increased
loss ratio is primarily attributable to an increase in the loss and loss
adjustment expense ratio for the property and casualty division whose loss and
loss adjustment expense ratio was 80.6% for the year ended December 31, 1998,
compared to 67.8% for the year ended December 31, 1997. Substantially all of
this increase is attributable to adverse development of prior year commercial
auto and general liability reserves as a result of ongoing reserve analysis
performed by the Company. During 1998, the Company completed several
organizational changes within the P&C claims and legal departments, partially in
response to the noted adverse development of prior year reserved amounts and
also to both strengthen the Company's in-house capabilities and streamline the
expense structure of settling P&C claims. Management believes that these changes
will strengthen the Company's reserving and claims settlement practices. The
surety loss and loss adjustment expense ratios remained constant at 28% for 1997
and 1998. The 1998 ratio includes the impact of the excess of loss and the
aggregate stop loss reinsurance treaties. During 1998 $4,168,000 was ceded in
premiums on these treaties with $4,100,000 ceded in losses. In 1997 $2,987,000
was ceded in premiums with no losses ceded to the reinsurers.
Competitive market conditions and the Company's ability to write surety
bonds for larger contractors has resulted, on many bonds, in the substitution of
indemnity agreements for liquid and non-liquid collateral. The Company, through
its ongoing reserve analysis, has estimated the benefit to be derived from such
agreements and reduced estimates of ultimate losses incurred accordingly. In the
fourth quarter of 1998, the Company increased its estimate of such "salvage and
subrogation" recoveries by approximately $5.4 million which is partially
attributable to salvage and subrogation on losses incurred during the fourth
quarter. The increase relates primarily to the 1998 and 1997 years and reflects
the Company's belief that the underlying data is maturing. Further, subsequent
collection efforts have proven prior estimates to be conservative. Since the
Company had also pierced it's aggregate excess contract in the fourth quarter,
the net benefit attributable to the increased "salvage and subrogation" estimate
was approximately $1,025,000.
<PAGE>
Policy acquisition costs as a percentage of net premiums earned decreased
from a ratio of 49% or $45,355,000 in 1997 to 48% or $51,090,000 in 1998. The
decrease is primarily attributable to an increase in commissions earned by the
Company on its quota share reinsurance treaties.
General operating costs decreased as a percentage of net premiums earned
from 14% or $12,606,000 in 1997 to 13% or $14,172,000 in 1998. The decrease in
the ratio is due to increased efficiency in servicing an increased premium base.
The 1998 amounts include a non-recurring $319,000 charge in connection with the
disposition and write-off of the Company's New York probate operation.
The Company's underwriting loss decreased from $468,000 for the year ended
December 31, 1997 to $122,000 for the year ended December 31, 1998. The combined
ratio decreased from 100.5% in 1997 to 100.1% in 1998. The decrease in the
underwriting loss is primarily attributable to improved performance in the
Company's surety product lines offset by increased losses in the Property &
Casualty Division as previously discussed.
Interest expense remained relatively flat at $1,966,000 in 1997 compared
with $1,917,000 in 1998. At December 31, 1997 and 1998, the collateral balances
accrued interest daily at an average rate of 3.7% per annum for both years.
Additionally, the average interest rate on the bank indebtedness increased from
an average rate of 7.3% during 1997 to an average rate of 7.4% during 1998 due
to fluctuations during 1998 in the London Interbank Offered (LIBOR) which is
used as the benchmark for the Company's rate on bank indebtedness. The interest
rate on the Company's bank indebtedness at December 31, 1998 was 7.1%.
Net investment income and realized investment gains increased 12% from
$9,869,000 in 1997 to $11,051,000 in 1998. This increase is primarily due to an
increase in realized investment gains from $3,473,000 during 1997 to $4,400,000
during 1998. In addition, net investment income before realized investment gains
increased 4% from $6,396,000 to $6,651,000 due to higher average invested
balances during 1998.
Income before income taxes increased from $7,435,000 in 1997 to $9,012,000
in 1998 due to the factors outlined above.
The effective tax rate was 26% for 1997 and 30% for 1998. The primary reason
for the variance from the corporate income tax rate of 34% is tax-advantaged
income received on a portion of the Company's investment portfolio offset by
certain non-deductible expenses. Additionally, due to various factors arising
during 1997, the Company eliminated its valuation allowance on its deferred tax
assets, which further lowered the 1997 effective tax rate.
Net income was $5,498,000 in 1997 and $6,269,000 in 1998 due to the factors
outlined above.
Year ended December 31, 1997 compared to year ended December 31, 1996
Gross premiums written increased 11% from $97,242,000 in 1996 to
$108,091,000 in 1997. Substantially, all of this premium growth was due to
written premium increases in the surety product lines. Management believes that
the increase in premiums written is attributable to the impact of
regionalization of contract surety underwriting function, thereby allowing the
Company to respond on a more timely basis to bond requests coupled with
continued strong growth in commercial surety and the purchase of two surety
agencies during 1997. The latter contributed approximately $1,800,000 of the
increase in written premiums during 1997.
Net premiums earned increased 5% from $87,883,000 in 1996 to $92,150,000 in
1997. The increase in net premiums earned reflects the increased premium
writings.
<PAGE>
Net losses and loss adjustment expenses decreased 26% from $46,647,000 in
1996 to $34,657,000 in 1997. This resulted in a decrease in the loss and loss
adjustment expense ratio from 53.1% in 1996 to 37.6% in 1997. The decreased loss
ratio is primarily attributable to a decrease in the loss and loss adjustment
expense ratio for contract performance and payment bonds from 52.9% in 1996 to
33.7% in 1997 as well as a decrease in adverse loss experience on the Company's
private passenger automobile program in the State of Arizona. The loss ratio on
contract performance and payment bonds in 1996 was negatively impacted by
increased severity caused by a number of large losses reported in that year.
Such losses were not experienced in 1997. The 1996 adverse loss experience on
private passenger business in Arizona was due to general rate inadequacy for
that program which the Company believes was corrected in 1997.
Policy acquisition costs as a percentage of net premiums earned increased
from a ratio of 43.7% of $38,367,000 in 1996 to 49.2% or $45,355,000 in 1997.
The increase is primarily attributable to a decline in contingent commissions
earned by the Company due to changes in its reinsurance treaties coupled with
higher commission rates paid on surety products due to intensified competitive
pressures during 1997.
General operating costs decreased as a percentage of net premiums earned
from 14.5% or $12,698,000 in 1996 to 13.7% or $12,606,000 in 1997. The decrease
in the actual amount of general operating costs is primarily attributable to
decreased home office occupancy costs due to the consolidation of the El Segundo
and Woodland Hills home offices locations in Calabasas, California during May
and June of 1997.
The Company's underwriting loss decreased from $9,829,000 for the year ended
December 31, 1996 to $492,000 for the year ended December 31, 1997. The combined
ratio decreased from 111.2% in 1996 to 100.5% in 1997. The decrease in the
underwriting loss is primarily attributable to decreased losses on the contract
performance and payment bond product line and Arizona private passenger
automobile lines of business as discussed above.
Interest expense decreased 11% from $2,217,000 in 1996 to $1,966,000 in 1997
primarily due to a decrease in funds held as collateral during 1997. At December
31, 1996 and 1997, the collateral balances accrued interest daily at an average
rate of 3.8% and 3.7% per annum, respectively. Additionally, the average
interest rate on the bank indebtedness decreased from an average rate of 7.8%
during 1996 to an average rate of 7.3% during 1997 due to fluctuations during
1997 in the London Interbank Offered Rate (LIBOR) which is used as the benchmark
for the Company's rate on bank indebtedness. This decrease was partially offset
by an increase in the outstanding debt of $2,000,000 in June 1997. The interest
rate on the company's bank indebtedness at December 31, 1997 was 7.52%
Net investment income and realized investment gains increased 10% from
$9,008,000 in 1996 to $9,869,000 in 1997. This increase is primarily due to an
increase in realized investment gains from $2,201,000 during 1996 to $3,473,000
in 1997. This increase was partially offset by a slight decrease in average
annual yield on investments from 5.2% in 1996 to 5.1% in 1997.
Merger expenses of $710,000 were incurred in 1996 in connection with the
merger of Condor Services, Inc. with and into Amwest Insurance Group, Inc. No
such costs were incurred during 1997.
Lease termination costs of $1,300,000 were incurred in 1996 in connection
with the signing of a definitive agreement to terminate the Company's lease at
its corporate headquarters prior to its scheduled termination in August 1998.
The Company moved to a new facility in Calabasas, California at significantly
reduced rental rates in June of 1997.
<PAGE>
Income (loss) before income taxes changed from a loss of $5,046,000 in 1996
to income of $7,435,000 in 1997 due to the factors outlined above.
The effective rate of the tax benefit was 46.8% for the year ended December
31, 1996. The effective tax rate for 1997 is 26.1%. The primary reason for the
variance from the corporate income tax rate of 34% is tax- advantaged income
received on a portion of the Company's investment portfolio. Additionally, due
to various factors arising during 1997, the Company eliminated its valuation
allowance on its deferred tax assets.
Net income (loss) changed from a loss of $2,686,000 in 1996 to income of
$5,498,000 in 1997 due to the factors outlined above.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had total cash and cash equivalents and
investments of $131,071,000. Included in these amounts is an aggregate of
$30,542,000 in funds held which are shown as a liability on the Company's
consolidated balance sheet. As of December 31, 1998, the Company's investment
balances were comprised of $107,227,000 in fixed maturities held at market,
$10,572,000 in common equity securities, $4,265,000 in preferred equity
securities, $4,375,000 in other invested assets and $2,201,000 in short-term
investments.
The Company's off balance sheet collateral which primarily consists of
irrevocable letters of credit and certificates of deposit increased from
$211,981,000 at December 31, 1997 to $218,360,000 at December 31, 1998. This
increase is primarily attributable to market conditions.
In addition, funds held increased from $23,116,000 at December 31, 1997 to
$30,542,000 at December 31, 1998. The Company reflects in its consolidated
financial statements only funds received as collateral on which net earnings
inure to the benefit of the Company. The increase in this amount is primarily
attributed to deposits attributable to the "Safety Association" which the
Company acquired during 1998. The amount of cash collateral can also be impacted
by the timing and payment of claims activity related to draws on irrevocable
letters of credit and certificates of deposit.
Because the Company depends primarily on dividends from its insurance
subsidiaries for its net cash flow requirements, absent other sources of cash
flow, the Company cannot pay dividends materially in excess of the amount of
dividends that could be paid by the insurance subsidiaries to the Company. See
Note 8 of Notes to Consolidated Financial Statements.
On August 6, 1994, the Company entered into a revolving credit agreement
with Union Bank for $12,500,000 which refinanced a previous loan. The debt
agreement was amended on April 24, 1996, July 10, 1996 and waived and amended as
of September 30, 1997 and 1998 to increase the amount available under the
revolving line of credit from $12,500,000 to $15,000,000 and to change certain
covenants and payment requirements. The bank loan has a variable rate of
interest based upon fluctuations in the London Interbank Offered Rate (LIBOR)
and has amortizing principal payments. The interest rate at December 31, 1998
was 7.1 %. The credit agreement contains certain financial covenants with
respect to capital expenditures, business acquisitions, liquidity ratio,
leverage ratio, tangible net worth, net profit and dividend payments. See Note
10 of Notes to Consolidated Financial Statements.
The Company is a party to a lease with ACD2 regarding its corporate
headquarters. The lease term is for a period of 15 years and contains provisions
for scheduled lease charges. The Company's minimum commitment with respect to
this lease in 1999 is approximately $932,000. The Company has the option to
<PAGE>
purchase this home office building and land commencing on April 27, 2000 and
extending for a six month period at a predetermined rate for the building, with
the value of land based on then existing market rates. See Note 12 of Notes to
Consolidated Financial Statements.
Other than the Company's obligations with respect to funds held, the
Company's obligations to pay claims as they arise, the Company's commitments to
pay principal and interest on the bank debt and lease expenses as noted above,
the Company has no significant cash commitments.
The Company believes that its cash flows from operations and other present
sources of capital are sufficient to sustain its needs for the remainder of
1999.
The Company generated $1,396,000, used $1,539,000 and used $697,000 in cash
from operating activities in the fiscal years ended December 31, 1996, 1997 and
1998, respectively. The Company generated $8,691,000, generated $3,835,000 and
used $7,526,000 in cash for investing activities for the fiscal years ended
December 31, 1996, 1997 and 1998, respectively. The Company used $8,885,000,
used $4,924,000 and generated $6,847,000 in cash from financing activities for
the fiscal years ended December 31, 1996, 1997 and 1998, respectively. The cash
used for investing activities in 1998 was funded principally by financing
activities.
The effect of inflation on the revenues and net income of the Company during
all three periods discussed above was not significant.
MARKET RISK
The main objective in managing the investment portfolios of the Company is
to maximize total investment returns while minimizing credit risks, in order to
provide maximum support to the insurance underwriting operations. Investment
strategies are developed based on many factors including expected underwriting
results, tax position, regulatory requirements, fluctuations in interest rates
and consideration of other market risks. Investment decisions are primarily
managed by the Company's investment advisors based on guidelines established by
management and approved by the board of directors.
Market risk represents the potential for loss due to adverse changes in the
fair value of financial instruments. The market risks related to financial
instruments of the Company primarily relate to the investment portfolio, which
exposes the Company to risks related to interest rates and, to a lesser extent,
credit quality, prepayment and equity prices.
Interest rate risk is the price sensitivity of a fixed income security to
changes in interest rates. Since most of the Company's property and casualty
business is short-tailed in nature, the Company has established duration
guidelines to be commensurate with our liabilities. Our guidelines have
established duration of the portfolio to be between 2-5 years.
The following table provides information about all our fixed maturity
investments which are sensitive to changes in interest rates. The table presents
cash flows of principal amounts and related weighted average interest rates by
expected maturity dates at December 31, 1998. The cash flows are based on the
earlier of the call date or the maturity date or, for mortgage-backed
securities, expected payment patterns. Actual cash flows could differ from the
expected amounts.
<PAGE>
<TABLE>
<CAPTION>
December 31, December 31, 1998
Estimated
There-After Amortized Market
1999 2000 2001 2002 2003 Cost Value
----------- ------------ ----------- ----------- ----------- ------------- -------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tax-exempt $1,500 $2,750 $4,995 $1,000 $2,400 $22,625 $36,376 $37,329
Average interest rate 3.74% 3.59% 3.77% 4.22% 3.97% 4.79% -- --
Taxable - other than
mortgage-backed
securities $3,340 $2,167 $ 4,700 $4,584 $4,432 $28,517 $45,821 $46,828
Average interest rate 4.49% 5.86% 5.23% 5.18% 5.52% 6.25% -- --
Mortgage-backed securities
$1,595 $3,371 $ 963 $ 708 $2,900 $13,294 $23,158 $23,070
Average interest rate 5.13% 5.85% 5.32% 5.84% 5.03% 6.86% -- --
=========== ============ =========== =========== =========== ============= ============== =============
Total $6,435 $8,288 $10,658 $6,292 $9,732 $64,436 $105,355 $107,227
=========== ============ =========== =========== =========== ============= ============== =============
</TABLE>
Prepayment risk refers to the changes in prepayment patterns related to
decreases and increases in interest rates than can either shorten or lengthen
the expected timing of the principal repayments and thus the average life and
the effective yield of a security.
Such risk exists primarily within the portfolio of mortgage-backed securities.
Equity market risk is defined as the chance that market influences will
affect the expected returns of all equities. Returns are influenced not only by
the fundamental attributes of investment securities, but by the price movements
of the general marketplace. Much of this depends on the sensitivity to the
overall market of the individual issue. The Company attempts to reduce this risk
through diversification and a focus on high quality, blue chip investments.
OTHER MATTERS
Year 2000 Issues:
The Company and its third party vendors are highly reliant on the use of
computers and embedded technology for the conduct of its business. Accordingly
the Company has, for several years, been in the process of analyzing, and to the
extent necessary either replacing non-year 2000 (Y2K) compliant systems or
fixing non-compliant Y2K systems in order to make them Y2K compliant.
The following is a summary of the Company's efforts to date with respect to
Y2K issues:
The Company's State of Readiness:
<PAGE>
The Company has summarized its exposure to Y2k issues by four general
categories which are:
1. Corporate Systems
2. Surety Specific Systems
3. Property and Casualty Systems
4. Third Party (Vendor) Systems
The Company's state of readiness with respect to each of these categories is
as follows:
Corporate Systems:
The Company has five significant corporate wide applications which include
Oracle financials, the system providing electronic interface between Oracle
financials and the Company's bank, fixed asset accounting, payroll, reinsurance
and corporate e-mail. The Company has completed its assessment of these systems
and believes that all of these systems other than the reinsurance system are Y2K
compliant. This conclusion is based on either certifications received from the
third party vendor(s) supplying the system or testing performed by the Company
for internally developed or modified systems. As stated the only currently
deployed corporate system which the Company believes to be non-Y2K compliant is
the reinsurance system. The Company is currently analyzing whether to replace
the system with a different Y2K compliant product or modify the current system
to make it Y2K compliant. Currently the Company estimates that the current
version would require one person month to make this system compliant.
Surety Specific Systems:
The Company has fourteen surety specific systems which vary in their
significance from critical (such as the surety production system commonly known
as ABS) to non-critical applications which only affect a small portion of the
surety business (such as several retail bail production systems). The Company
has completed its assessment of its fourteen surety specific systems and
believes that all of the mission critical surety specific systems are Y2K
compliant other than the Company's probate production system, cash collateral
system and one bail system. This conclusion is based on either certifications
received from the third party vendor(s) supplying the system or testing
performed by the Company for internally developed or modified systems. The
Company is currently in the process of modifying its ABS system in order for it
to be used for probate production and is proceeding with completing system
changes for the cash collateral and bail systems. The Company expects that these
modifications will be completed during the second quarter of 1999, and will be
implemented immediately thereafter.
Property and Casualty Systems:
The Company has 4 mission critical systems for its property and casualty
operations. These include a personal lines system supplied by an outside vendor,
a commercial lines system also supplied by an outside vendor, a system for
electronic transmission for the Company's program business and data replicating
software supplied by an outside vendor. The Company has completed its assessment
of these four systems and believes that the personal lines system, the
internally developed system for electronic transmission of program business and
the data replicating system are Y2K compliant while the commercial lines system
is not Y2K compliant. This conclusion is based on either certifications received
from the third party vendor(s) supplying the system or testing performed by the
Company for internally developed or modified systems. The Company is currently
in the process of developing a new commercial lines system to replace the
non-Y2K compliant system supplied by an outside vendor. The Company currently
estimates that this system will be completed and installed during the third
quarter of 1999.
<PAGE>
Third Party (Vendor) Systems:
In addition to the above systems where the Company is primarily responsible
for assessing, analyzing and implementing Y2K compliant systems, the Company may
also be affected by any of the agents, brokers, suppliers, financial
institutions or others with whom the Company does business who may be materially
affected by Y2K problems and thus indirectly affect the Company. Where
appropriate, the Company has inquired as to the state of readiness with respect
to these third parties, but the Company has not performed any independent Y2K
testing of these systems as the Company does not believe that such independent
testing would be cost justified.
Costs to Address the Year 2000 Issues:
The majority of the costs associated with system development of year 2000
compliant systems have been associated with the development of the ABS surety
production system and the property and casualty personal and commercial lines
systems. In all three of these cases, the underlying previously utilized systems
had significant business related flaws, such that they needed to be replaced
without regard to year 2000 compliance issues. The Company does not believe that
the incremental costs of making the replacement systems Y2K compliant were or
will be significant. Further, for those systems which have been modified solely
to assure Y2K compliance, the Company does not believe that these costs are
material.
Risks of the Company's Year 2000 Issues:
The Company has analyzed the risks associated with the year 2000 issues and
concluded that the biggest risk which the Company can have a reasonable
influence toward preventing is the lack of Y2K compliance by the commercial
lines property and casualty production system. The commercial lines represent
approximately $20,000,000 of written premiums for the Company and the lack of a
Y2K compliant system for this business could have a significant adverse impact
on the Company's results.
The Company has also reviewed the underwriting risks associated with its
insureds for both the property and casualty and surety products and believes
that the major risk with respect to Y2K non-compliance relates to the surety
product. Should Y2K problems affect the ability of the Company's principals to
complete projects and pay subcontractors on a timely basis it could have a
material adverse affect on the Company's surety loss ratio. Further, should Y2K
problems affect the ability of obligees to pay for work performed on bonded
projects, liquidity issues for principals could also impact the Company's surety
loss ratio. The Company is unable to estimate the affect such risks will have on
the Company's financial results.
Contingency Plans:
Due to the potential for sweeping problems associated with the Y2K issue,
the Company believes that any contingency plan for addressing Y2K must be
flexible and part of a broad based disaster recovery plan. The Company's
experience with disaster recovery (the Northridge earthquake) has led it to
believe that a rigid disaster recovery plan will be less effective than a
flexible plan which analyzes the specific problems associated with each unique
disaster and proposes solutions based on the problems encountered. Other than
for the specific internal systems which are not currently Y2K compliant and for
which the Company is developing contingency plans (substantially based on
temporary manual intervention), the Company believes that a broad based disaster
recovery plan will be more effective in addressing the multitude of potential
Y2K problems. The Company has developed a disaster recovery plan and will use
this plan in responding to scenarios created by the Y2K problem.
<PAGE>
Other Issues:
Certain statements contained in this Form 10-K regard matters which are not
historical facts and are forward looking statements. Because such forward
looking statements include risks and uncertainties, actual results may differ
materially from those expressed in or implied by such forward looking
statements. Factors that could cause actual results to differ materially
include, but are not limited to: A decline in demand for surety bonds or
specialty property and casualty insurance, the ineffectiveness of programs
initiated and changes made by management, a deterioration in results of any of
the Company's product lines, or a general economic decline. The Company
undertakes no obligation to release publicly the results of any revisions to
these forward looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements required in response to this section
are submitted as part of Item 14(a) of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information regarding Directors and Executive Officers of the
Registrant, reference is made to the Registrant's definitive proxy statement for
its Annual Meeting of Stockholders to be held on May 21, 1999, which will be
filed with the Securities and Exchange Commission within 120 days after December
31, 1998, and which is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
For information regarding executive compensation, reference is made to the
Registrant's definitive proxy statement for its Annual Meeting of Stockholders
to be held on May 21, 1999, which will be filed with the Securities and Exchange
Commission within 120 days after December 31, 1998, and which is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
For information regarding security ownership of certain beneficial owners
and management, reference is made to the Registrant's definitive proxy statement
for its Annual Meeting of Stockholders to be held on May 21, 1999, which will be
filed with the Securities and Exchange Commission within 120 days after December
31, 1998, and which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information regarding certain relationships and related transactions,
reference is made to the Registrant's definitive proxy statement for its Annual
Meeting of Stockholders to be held on May 21, 1999, which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 1998, and
which is incorporated herein by reference.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements
The index to the consolidated financial statements appears on page 38.
(b) Reports on Form 8-K
None.
(c) Exhibits
3.1 Restated Certificate of Incorporation of the Company as amended
to date. (Incorporated by reference to Exhibit 3(3)(a) to the
Company's Form 8-B Registration Statement No. 1-9580.)
3.2 Bylaws of the Company. (Incorporated by reference to Exhibit
3.2 of the Company's 1990 Form 10-K.)
4.1 Specimen Common Stock Certificate. (Incorporated by reference to
Exhibit 3(4) to the Company's Form 8-B Registration Statement
No. 1-9580.)
10.1 Third-party administrative support service agreement for
California Non-CAIP Assigned Risk Automobile (Incorporated by
reference to Exhibit 10.28 to Condor Services, Inc.'s 1991 Form
10-K).
10.2 Investment Management Agreement between the Company and AAM
Advisors, Inc., dated August 11, 1992. (Incorporated by
reference to Exhibit 10.21 to the Company's 1992 Form 10-K.)
10.3 Contract between the Company and Scudder, Stevens & Clark, Inc.,
dated August 13, 1992. (Incorporated by reference to Exhibit
10.22 to the Company's 1992 Form 10-K.)
10.4 Lease Agreement dated January 24, 1996 by and between Amwest
Insurance Group, Inc. and ACD2, a California corporation
(Incorporated by reference to 10.24 to the Company's Form S-4
Registration Statement No. 333-00119)
10.5 Option Agreement dated January 24, 1996 by and between Amwest
Insurance Group, Inc. and ACD2, a California corporation
(Incorporated by reference to 10.25 to the Company's Form S-4
Registration Statement No. 333-00119)
10.6 Restated Revolving Credit Agreement dated July 10, 1996 between
Amwest Insurance Group, Inc. and Union Bank of California, N.A.
(Incorporated by reference to Exhibit 10.55 to the Company's
1996 Form 10-K.)
10.7 Waiver and Amendment No. 1 dated as of September 30, 1997 to the
Restated Revolving Credit Agreement dated July 10, 1996.
(Incorporated by reference to Exhibit 19.1 to the Company's
September 30, 1997 Form 10-Q.)
<PAGE>
10.8 Waiver and Amendment No. 2 dated as of February 9, 1999 to the
Restated Revolving Credit Agreement dated July 10, 1996.
10.9 Casualty Excess of Loss Reinsurance Contract effective July 1,
1996 issued to Condor Insurance Company, Amwest Surety Insurance
Company and Far West Insurance Company by a group of reinsurers
led by Gerling Global Reinsurance Corporation. (Incorporated by
reference to Exhibit 10.53 to the Company's 1996 Form 10-K.)
10.10 Contingent Excess of Loss Reinsurance Contract effective July 1,
1998 issued to Condor Insurance Company, Amwest Surety Insurance
Company and Far West Insurance Company by a group of reinsurers
led by Kemper Reinsurance Company.
10.11 Excess of Loss Reinsurance Contract effective October 1, 1997
issued to Amwest Surety Insurance Company by a group of
reinsurers lead by Kemper Reinsurance Company. (Incorporated by
reference to Exhibit 10.10 to the Company's 1997 Form 10-K.)
10.12 Aggregate Stop Loss Reinsurance Contract effective January 1,
1998 issued to Amwest Surety Insurance Company, Far West
Insurance Company and Condor Insurance Company by Underwriters
Reinsurance Company (Barbados) Inc.
10.13 50% Private Passenger Automobile Quota Share Reinsurance
Contract effective July 1, 1997 issued to Condor Insurance
Company, Amwest Surety Insurance Company and Far West Insurance
Company by Gerling Global Reinsurance Corporation and USF RE
Insurance Company. (Incorporated by reference to Exhibit 10.12
to the Company's 1997 Form 10-K.)
10.14 75% California Homeowners Multiple Line Quota Share Reinsurance
Contract effective July 1, 1997 issued to Condor Insurance
Company, Amwest Surety Insurance Company and Far West Insurance
Company by Constitution Reinsurance Corporation and Vesta Fire
Insurance Company. (Incorporated by reference to Exhibit 10.13
to the Company's 1997 Form 10-K.)
10.15 75% Florida Multiple Line Quota Share Reinsurance Contract
effective July 1,1998 issued to Condor Insurance Company, Amwest
Surety Insurance Company and Far West Insurance Company by a
group of reinsurers led by Vesta Fire Insurance Corporation.
10.16 Quota Share Reinsurance Agreement effective July 1, 1998 issued
to Amwest Surety Insurance Company by Underwriters
Reinsurance Company.
10.17 Stock Option Plan of the Company, as amended. (Incorporated by
reference to Exhibit 4.1 to the Company's Form S-8
Registration Statement No. 33-82178.)
10.18 Form of Indemnity Agreement between the Company and Individual
Directors and Certain Officers Designated by the Company's Board
of Directors. (Incorporated by reference to Exhibit 3(10) to the
Company's Form 8-B Registration Statement No. 1-9580.)
10.19 Form of Senior Executive Severance Agreement entered into by the
Company and certain officers. (Incorporated by reference to
10.20 to the Company's 1989 Form 10-K.)
<PAGE>
10.20 Rights Agreement dated as of May 10, 1989 executed by the
Company and Bankers Trust Company of California, N.A., as rights
agent. (Incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement on Form 8-A dated May 11,
1989.)
10.21 Non-Employee Director Stock Option Plan of the Company.
(Incorporated by reference to Exhibit 4.2 to the Company's
Form S-8 Registration Statement No. 33-82178.)
10.22 Amwest Insurance Group, Inc. 1998 Stock Incentive Plan
(Incorporated by reference to Exhibit 4.1 to the Company's
Form S-8 Registration Statement No. 333-61819.)
10.23 Amwest Insurance Group, Inc. Employee Stock Purchase Plan
(Incorporated by reference to Exhibit 99.1 to the Company's Form
S-8 Registration Statement No. 333-17109.)
11.1 Statement regarding computation of per share earnings. (See
Note 1 of Notes to Consolidated Financial Statements.)
21.1 List of Subsidiaries of Registrant. (Incorporated by reference
to Exhibit 3(22) to the Company's Form 8-B Registration
Statement No. 1-9580.)
23.1 Consent of KPMG LLP for incorporation by reference of their
opinion to the Registration Statements Nos. 33-11020, 33-24243,
33-38128 and 33-82178 on Form S-8 and in Registration Statements
Nos. 33-28645 and 33-37984 on Form S-3 of Amwest Insurance
Group, Inc. (See page 71 of the Consolidated Financial
Statements.)
(d) Schedules
Independent Auditors' Report.
Index to financial statement schedules.
Schedule Caption
I Summary of Investments-Other Than Investments in Related Parties
at December 31, 1998.
II Condensed Financial Information of the Registrant.
III Supplementary Insurance Information
Items omitted are not applicable or not required for Form 10-K.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMWEST INSURANCE GROUP, INC.
Date: March 26, 1999 By: /s/ JOHN E. SAVAGE
-----------------------------
John E. Savage
President, Chief Operating Officer,
Co-Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signature Title Date
Chairman of the Board and
Co- Chief Executive Officer
/s/ RICHARD H. SAVAGE (Principal Executive Officer) March 26,1999
- ------------------------
Richard H. Savage
President, Chief Operating Officer,
Co- Chief Executive Officer
/s/ JOHN E. SAVAGE and Director March 26,1999
- ------------------------
John E. Savage
/s/ GUY A. MAIN Executive Vice President and Direct March 26,1999
- ------------------------
Guy A. Main
Senior Vice President, Chief Financial
Officer, Treasurer and Director
(Principal Financial and Principal
/s/ STEVEN R. KAY Accounting Officer) March 26,1999
- -----------------------
Steven R. Kay
/s/ NEIL F. PONT Senior Vice President and Director March 26,1999
- ------------------------
Neil F. Pont
<PAGE>
/s/ ARTHUR F. MELTON Director March 26,1999
- ------------------------
Arthur F. Melton
/s/ THOMAS R. BENNETT Director March 26,1999
- ------------------------
Thomas R. Bennett
/s/ BRUCE A. BUNNER Director March 26,1999
- ------------------------
Bruce A. Bunner
/s/ ROBERT W. KLEINSCHMIDT Director March 26,1999
- -----------------------------
Robert W. Kleinschmidt
/s/ JONATHAN K. LAYNE Director March 26,1999
- ------------------------
Jonathan K. Layne
/s/ ROLAND D. MILLER Director March 26,1999
- ------------------------
Roland D. Miller
/s/ CHARLES L. SCHULTZ Director March 26,1999
- ------------------------
Charles L. Schultz
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report 39
Consolidated Financial Statements:
Consolidated Statements of Operations and
Comprehensive Income for the Years Ended
December 31, 1998, 1997 and 1996 40
Consolidated Balance Sheets as of December 31, 1998 and 1997 41
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1998, 1997 and 1996 43
Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended December 31, 1998, 1997 and 1996 44
Notes to Consolidated Financial Statements 45
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Amwest Insurance Group, Inc.:
We have audited the accompanying consolidated balance sheets of Amwest
Insurance Group, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations and comprehensive income, cash
flows and changes in stockholders' equity for each of the years in the three
year period ended December 31, 1998. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Amwest
Insurance Group, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
Los Angeles, California
February 3, 1999
KPMG LLP
<PAGE>
<TABLE>
<CAPTION>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Dollars in thousands, except share and per share data)
Years ended December 31,
OPERATIONS 1998 1997 1996
----------------- ---------------- -----------------
<S> <C> <C> <C>
Underwriting Revenues:
Net premiums written $ 107,961 $100,034 $89,325
Net change in unearned premiums (1,990) (7,884) (1,442)
----------------- ---------------- -----------------
Net premiums earned 105,971 92,150 87,883
----------------- ---------------- -----------------
Underwriting Expenses:
Net losses and loss adjustment expenses 40,831 34,657 46,647
Policy acquisition costs 51,090 45,355 38,365
General operating costs and expenses 14,172 12,606 12,698
----------------- ---------------- -----------------
Total underwriting expenses 106,093 92,618 97,710
----------------- ---------------- -----------------
Underwriting loss (122) (468) (9,827)
Interest expense (1,917) (1,966) (2,217)
Merger expense - - (710)
Lease termination cost - - (1,300)
Net investment income 6,651 6,396 6,807
Net realized gains 4,400 3,473 2,201
----------------- ---------------- -----------------
Income (loss) before income taxes 9,012 7,435 (5,046)
----------------- ---------------- -----------------
Provision (benefit) for income taxes:
Current 2,985 761 (1,947)
Deferred (242) 1,176 (413)
----------------- ---------------- -----------------
Total provision (benefit) for income taxes 2,743 1,937 (2,360)
----------------- ---------------- -----------------
Net income (loss) $ 6,269 $ 5,498 $ (2,686)
================= ================ =================
Earnings (loss) per common share:
Basic $ 1.62 $ 1.48 $ (.74)
================= ================ =================
Diluted $ 1.59 $ 1.46 $ (.74)
================= ================ =================
COMPREHENSIVE INCOME (LOSS)
Net income (loss) $ 6,269 $ 5,498 $ (2,686)
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities, net of income taxes
of $498, $(959) and $320, respectively 1,258 3,608 490
Reclassification adjustment for gains included in net income (2,225) (1,748) (1,108)
----------------- ---------------- -----------------
Comprehensive income (loss) $ 5,302 $ 7,358 $ (3,304)
================= ================ =================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31,
1998 1997
---------------- -----------------
ASSETS
<S> <C> <C>
Investments:
Fixed maturities, available-for-sale (amortized cost of $105,355 and
$96,516 at December 31, 1998 and 1997, respectively) $ 107,227 $ 98,746
Common equity securities, available-for-sale (cost of $7,692 and
$6,856 at December 31, 1998 and 1997, respectively) 10,572 10,297
Preferred equity securities, available-for-sale (cost of $4,258
and $2,664 at December 31, 1998 and 1997, respectively) 4,265 2,894
Other invested assets (cost of $4,058 and $5,816 at December 31,
1998 and 1997, respectively) 4,375 6,455
Short-term investments 2,201 2,281
---------------- -----------------
Total investments 128,640 120,673
Cash and cash equivalents 2,431 3,807
Accrued investment income 1,470 1,366
Agents' balances and premiums receivable (less allowance for doubtful accounts
of $1,015 and $467 at December 31, 1998 and 1997,
respectively) 17,309 12,511
Reinsurance recoverable:
Paid loss and loss adjustment expenses 6,236 2,524
Unpaid loss and loss adjustment expenses 9,837 6,185
Ceded unearned premiums 8,584 2,039
Deferred policy acquisition costs 20,209 21,299
Furniture, equipment and improvements, net 6,267 5,355
Income taxes recoverable 951 1,581
Other assets 14,357 13,179
---------------- -----------------
Total assets $ 216,291 $190,519
================ =================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(Dollars in thousands, except share and per share data)
December 31,
1998 1997
---------------- -----------------
LIABILITIES
<S> <C> <C>
Unpaid losses and loss adjustment expenses $ 42,244 $ 39,523
Unearned premiums 51,627 42,013
Funds held 30,542 24,434
Deferred Federal income taxes 3,185 3,925
Bank indebtedness 14,500 14,500
Amounts due to reinsurers 4,393 455
Other liabilities 7,898 8,490
---------------- -----------------
Total liabilities 154,389 133,340
---------------- -----------------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 1,000,000 shares authorized: issued
and outstanding; none - -
Common stock, $.01 par value, 10,000,000 shares authorized: issued and
outstanding; 3,919,618 at December 31, 1998 and 3,798,141 at
December 31, 1997 39 38
Additional paid-in capital 19,183 18,209
Net unrealized gains on investments carried at market, net of income
taxes 3,349 4,316
Retained earnings 39,331 34,616
---------------- -----------------
Total stockholders' equity 61,902 57,179
---------------- -----------------
Total liabilities and stockholders' equity $ 216,291 $190,519
================ =================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(Dollars in thousands)
Years ended December 31,
1998 1997 1996
----------------- ---------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 6,269 $5,498 $ (2,686)
Adjustments to reconcile net income to cash provided by
operating activities:
Change in agents' balances, premiums receivable and
unearned premiums 4,816 6,445 (1,176)
Change in accrued investment income (104) 33 174
Change in unpaid losses and loss adjustment expenses
2,721 (2,486) 10,094
Change in reinsurance recoverables and ceded
unearned premiums (13,909) 293 434
Change in amounts due to/from reinsurers 3,938 110 (1,843)
Change in other assets and other liabilities (3,088) (6,547) 2,737
Change in income taxes, net 388 2,346 (3,132)
Change in deferred policy acquisition costs 1,090 (5,198) (2,216)
Net realized gain on sale of investments (4,400) (3,478) (2,295)
Net realized loss on sale of fixed assets 6 48 44
Provision for depreciation and amortization 1,576 1,398 1,261
----------------- ---------------- -----------------
Net cash provided (used) by operating activities (697) (1,538) 1,396
----------------- ---------------- -----------------
Cash flows from investing activities:
Cash received from investments sold 74,642 52,441 59,093
Cash received from investments matured or called 18,475 8,545 7,468
Cash paid for investments acquired (98,331) (55,214) (55,197)
Amortization/accretion of bonds 181 116 68
Capital expenditures, net (2,493) (2,053) (2,741)
----------------- ---------------- -----------------
Net cash provided (used) by investing activities (7,526) 3,835 8,691
----------------- ---------------- -----------------
Cash flows from financing activities:
Proceeds from issuance of long term debt - 2,000 -
Proceeds from issuance of common stock 975 1,382 299
Change in funds held 7,426 (6,812) (7,722)
Dividends paid (1,554) (1,494) (1,462)
----------------- ---------------- -----------------
Net cash provided (used) by financing activities 6,847 (4,924) (8,885)
----------------- ---------------- -----------------
Net increase (decrease) in cash and cash equivalents (1,376) (2,627) 1,202
Cash and cash equivalents at beginning of year 3,807 6,434 5,232
----------------- ---------------- -----------------
Cash and cash equivalents at end of year $ 2,431 $ 3,807 $ 6,434
================= ================ =================
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 1,917 $ 1,966 $ 2,217
Cash paid during the year for income taxes 4,023 460 848
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except share data)
Years ended December 31, 1998, 1997, and 1996
Net unrealized
Common stock appreciation
----------------------- (depreciation)
$.01 Additional of investments Total
Shares issued par paid-in carried at Retained stockholders'
value capital market earnings equity
-------------- -------- -------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 3,669,168 $ 37 $ 17,204 $ 3,074 $ 34,760 $ 55,075
Retirement of shares pursuant to the
completion of the merger (53,548) - (676) - - (676)
Issuance of common stock pursuant to
the exercise of options 42,982 - 299 - - 299
Change in net unrealized appreciation
of investments carried at market - - - (618) - (618)
Cash dividends - - - - (1,462) (1,462)
Net loss - - - - (2,686) (2,686)
-------------- -------- -------------- ---------------- -------------- --------------
Balance at December 31, 1996 3,658,602 37 16,827 2,456 30,612 49,932
Issuance of common stock pursuant to
the exercise of options 78,210 1 681 - - 682
Issuance of common stock pursuant to
the employee stock purchase plan 9,320 - 132 - - 132
Issuance of common stock for agency
purchases 52,009 - 569 - - 569
Change in net unrealized appreciation
of investments carried at market - - - 1,860 - 1,860
Cash dividends - - - - (1,494) (1,494)
Net income - - - - 5,498 5,498
-------------- -------- -------------- ---------------- -------------- --------------
Balance at December 31, 1997 3,798,141 38 18,209 4,316 34,616 57,179
Issuance of common stock pursuant to
the exercise of options 73,788 1 439 - - 440
Issuance of common stock pursuant to
the employee stock purchase plan 16,315 - 215 - - 215
Issuance of common stock for agency
purchases 31,374 - 320 - - 320
Change in net unrealized appreciation
of investments carried at market - - - (967) - (967)
Cash dividends - - - - (1,554) (1,554)
Net income - - - - 6,269 6,269
-------------- -------- -------------- ---------------- -------------- --------------
Balance at December 31, 1998 3,919,618 $ 39 $ 19,183 $ 3,349 $ 39,331 $ 61,902
============== ======== ============== ================ ============== ==============
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Amwest Insurance Group, Inc., (the "Company") through its wholly-owned insurance
subsidiaries, is primarily engaged in underwriting surety bonds nationwide,
commercial automobile insurance in the state of California and, to a lesser
extent, other property and casualty coverages in various parts of the United
States. The surety bonds are predominantly written through the Company's 30
branch and field offices located throughout the United States. In 1998 and 1997,
respectively, the Company's direct premiums written in California was 36.9% and
38.1%.
On March 14, 1996, the Company completed a merger with Condor Services, Inc.
("Condor Services"), an insurance holding company. In the merger, each
outstanding share of Condor Services' common stock (other than shares owned by
Condor Services as treasury stock or by the Company) were converted into the
right to receive 0.5 of share of the Company's common stock. In connection with
the merger, the Company issued 992,000 shares of common stock. The merger has
been accounted for under the pooling of interests method.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Amwest Insurance Group, Inc. and its wholly-owned subsidiaries, Amwest Surety
Insurance Company ("Amwest Surety"), Condor Insurance Company ("Condor") and Far
West Insurance Company ("Far West"). The consolidated financial statements have
been prepared in conformity with generally accepted accounting principles
("GAAP") which differ in some respects from those followed in reports to
insurance regulatory authorities. Intercompany transactions and balances have
been eliminated.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that effect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Earnings Per Share
Basic EPS is calculated based on the weighted average number of common shares
outstanding and diluted EPS includes the effects of dilutive potential common
shares. The weighted average number of common shares outstanding for the year
ended December 31, 1996 is based upon Amwest Insurance Group, Inc. and Condor
Services, Inc.'s combined historical weighted average shares, after adjustment
of Condor Services, Inc.'s historical number of shares as converted and
excluding any Condor Services, Inc.'s shares held in treasury or owned by the
Company. The effect on reported EPS data is as follows:
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31,
Income Shares Per-Share
(Numerator) (Denominator) (1) Amount (1)
($ in thousands) (Dollars)
--------------------- ----------------------- --------------------
<S> <C> <C> <C>
Basic EPS:
1998 $ 6,269 3,871,531 $ 1.62
1997 $ 5,498 3,723,251 $ 1.48
1996 $ (2,686) 3,647,414 $ (.74)
Effect of Dilutive Securities:
1998 69,340
1997 47,197
1996 36,990
Diluted EPS:
1998 $ 6,269 3,940,871 $ 1.59
1997 $ 5,498 3,770,448 $ 1.46
1996 $ (2,686) 3,684,404 $ (.74)
<FN>
(1) Amounts reflect a 10% stock dividend effective March 31, 1998.
</FN>
</TABLE>
Diluted earnings per common share for 1996 is the same as basic earnings per
share because the result of the calculation is antidilutive due to the net
operating loss reported for the year. Dilutive securities are the Company's
stock options. See Note 18 for further discussion on stock options.
Deferred Policy Acquisition Costs
Acquisition costs related to unearned premiums, consisting of commissions,
premium taxes, salaries and other acquisition costs, are deferred and amortized
to income ratably over the estimated term of the bond or the effective period of
the policy. These costs vary with and are related to the production of business.
Deferred acquisition costs are limited to the estimated future profit, based on
the anticipated losses and loss adjustment expenses, maintenance costs and
investment income.
Policy acquisition costs incurred and amortized to income are as follows:
Years ended December 31,
1998 1997 1996
(Dollars in thousands)
-----------------------------------------------
Balance at beginning of year $ 21,299 $ 16,101 $ 13,885
Costs deferred during the year 50,000 50,553 40,581
Amortization charged to expense (51,090) (45,355) (38,365)
-------------- --------------- ----------------
Balance at end of year $ 20,209 $ 21,299 $ 16,101
============== =============== ================
<PAGE>
Federal Income Taxes
Deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying the applicable tax rate to differences between the
financial statement carrying amounts and the tax basis of existing assets and
liabilities. The effect on deferred taxes of a change in tax rates is recognized
in income in the period that includes the enactment date.
Cash and Cash Equivalents
The cash and cash equivalents shown on the statements of cash flows include cash
and short-term, highly liquid investments (those with original maturities when
purchased of ninety days or less).
Funds Held
The Company accepts various forms of collateral for issuance of its surety
bonds, including cash, trust deeds or mortgages on real property, irrevocable
letters of credit, certificates of deposit, savings accounts and publicly traded
securities. The Company's policy is to record in the accompanying consolidated
financial statements only funds received as collateral on which earnings inure
to the benefit of the Company. These funds are not restricted as to withdrawal
or usage, are not segregated by the Company and are invested on an ongoing
basis. At December 31, 1998, the related collateral balances accrue interest
daily at an average rate of 3.7% per annum and are due and payable (together
with accrued interest) to the collateral owner upon exoneration of the
underlying liability.
The Company also holds deposits for contractors for whom the Company is
controlling disbursements from obligees ("funds control") and deposits for
commercial transportation insureds on which the earnings inure to the benefit of
the Company.
Investments
Fixed maturities include bonds, notes and redeemable preferred stock. In
connection with establishing its investment objectives, the Company determined
that it needed to maintain flexibility to respond to changes in interest rates,
tax planning considerations or other aspects of asset/liability management.
Since the Company does not purchase fixed maturity investments with a view
towards resale, the fixed maturities have been classified as
"available-for-sale" and are carried at market value.
Market values for fixed maturities are obtained from a national quotation
service. Temporary unrealized investment gains and losses on fixed maturities,
available-for-sale are credited or charged directly to stockholders' equity, net
of applicable tax affect. When a decline in market value of fixed maturities is
considered to be other than temporary, a loss is recognized in the consolidated
statement of operations. Mortgage backed securities are valued at amortized cost
using the pro-rata method of amortization including anticipated prepayments
calculated at the date of purchase using the average life method. Adjustments
are made as necessary to the value of the bonds for changes in the average life
calculation. These changes are based upon current and past experience for the
underlying collateral.
<PAGE>
Equity securities are carried at market value. Net unrealized appreciation
(depreciation) on equity securities "available for sale", to the extent that
there is no other than temporary impairment of value, is credited or charged
directly to stockholders' equity, net of applicable income tax affect. Market
values for equity securities are principally determined by quotations on
national securities exchanges. When a decline in market value is considered to
be other than temporary, a loss is recognized in the consolidated statement of
operations.
Realized gains and losses are determined using the specific identification
method.
Short-term investments consist primarily of certificates of deposit with
original maturities of less than one year and greater than 90 days and are
stated at cost which approximates market value.
Losses and Loss Adjustment Expenses
The liability for unpaid losses and loss adjustment expenses is based upon the
accumulation of individual case estimates for losses reported prior to the close
of the accounting period plus estimates of unreported claims. The liability is
stated net of anticipated salvage and subrogation recoverable and other
non-reinsurance recoveries.
In evaluating reserves for surety losses and loss adjustment expenses, the
Company considers a number of factors including an estimate of the costs to
complete the project, outstanding obligations to subcontractors, supplies and
the like and prevailing case law and regulations pertaining to the underlying
exposures. The Company also considers the financial strength of the principal,
estimated offsets to the claimed amount, such as collateral, contract funds and
indemnity agreements, and defenses available to the principal and the Company.
The Company may use outside attorneys and construction consultants throughout
the reserving process. All reserves for reported claims are net of anticipated
collateral and other non-reinsurance recoveries. Reserves for incurred but not
reported claims are based on Company experience. An amount is included in the
reserves for unallocated loss adjustment expenses consisting of the costs for
the Company's claims, legal and subrogation departments to settle claims
incurred prior to year end.
The loss settlement period on most of the Company's insurance claims is
relatively short. Nevertheless, it is often necessary to adjust estimates of
liability on a claim either upward or downward between the time a claim is
reported and the time of payment. There are inherent uncertainties in estimating
reserves, therefore, actual losses and loss adjustment expenses may deviate,
perhaps substantially, from reserves on the accompanying consolidated financial
statements, which could have a material adverse effect on the Company's
financial condition and results of operations. The Company does not discount its
claim reserves for financial reporting purposes. While the Company may make
implicit provisions for inflation or increasing costs in establishing reserves
for known claims, the relatively short claim to payment period and the nature of
the insured losses makes provisions for inflation or increasing costs generally
unnecessary. Any differences between estimates and ultimate payments are
reflected in the consolidated statements of operations in the period in which
such estimates are changed and could have a material adverse effect on the
Company's financial condition and results of operations at that time.
<PAGE>
Premium Income Recognition
Premium income on surety bonds are recognized as follows: bonds with a known
term (such as contractor's license, sales tax and most miscellaneous bonds), are
recognized as income ratably over the term of the bond. Bonds on which the
Company has significant experience in and information available for estimating
the term (such as most court bonds and customs bonds) are recognized as income
over the estimated term of the bond. For other bonds with indefinite terms
(generally contract performance bonds), the Company estimates a term of twelve
months, and premiums are recognized ratably over such period, unless information
comes to the Company's attention that the obligation guaranteed has already been
discharged, in which case all remaining unearned premiums are immediately
recognized as earned.
Premium income on non-surety property and casualty policies are recognized
ratably over the effective period of the policy.
Reinsurance
In the normal course of business, the Company seeks to reduce the loss that may
arise from catastrophes or other events that cause unfavorable underwriting
results by reinsuring certain levels of risk in various areas of exposure with
other insurance enterprises or reinsurers. Amounts recoverable from reinsurers
are estimated in a manner consistent with the premium and claim liability
associated with the reinsured bond or policy.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments", and Statement of Financial Accounting Standards
No. 119, "Disclosures about Derivative Financial Instruments and Fair Value of
Financial Instruments", require disclosure of estimated fair value information
about financial instruments, for which it is practicable to estimate that value.
Under Statement of Financial Accounting Standards No. 115, the Company
categorizes all of its investments in debt and equity securities as available
for sale. Accordingly, all investments, including cash and short term
investments, are carried on the balance sheet at their fair value. The carrying
amounts and fair values for investment securities are disclosed in Note 3 and
were drawn from standard trade data sources such as market and broker quotes.
The estimated fair value of bank indebtedness equals its carrying value, which
was based on the bank loan's variable interest rate which approximates the rates
currently available today. The carrying amounts and fair values for the bank
indebtedness are disclosed in Note 10.
Risk-Based Capital
The NAIC has adopted a risk-based capital formula for property and casualty
insurance companies which establishes recommended minimum capital requirements.
The formula has been designed to capture the widely varying elements of risks
undertaken by writers of different lines of insurance having differing risk
characteristics, as well as writers of similar lines where differences in risk
may be related to corporate structure, investment policies, reinsurance
arrangements and a number of other factors. The Company has calculated its
risk-based capital requirement as of December 31, 1998 and found that its
subsidiaries exceeded the highest level of recommended capital requirement.
<PAGE>
Segment Information
In 1998, the Company adopted Financial Accounting Standards No. 131 ("FAS 131"),
"Disclosures about Segments of an Enterprise and Related Information," which
requires reporting certain financial information according to the "management
approach." This approach requires reporting information regarding operating
segments on the basis used internally by management to evaluate segment
performance. FAS 131 also requires disclosures about products and services,
geographic areas and major customers. The statement was effective December 31,
1998 and has been adopted for all periods presented.
Reclassifications
Certain amounts in the accompanying consolidated financial statements for 1996
and 1997 have been reclassified to conform with the 1998 financial statement
presentation.
(2) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND FINANCIAL
INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK
The vast majority of the collateral held by the Company does not qualify for
inclusion in the accompanying consolidated financial statements. The Company's
policy is to record in the accompanying consolidated financial statements only
those funds received as collateral on which earnings inure to the benefit of the
Company. Most of the off-balance sheet collateral is in the form of irrevocable
letters of credit and certificates of deposit.
On a case-by-case basis, loss reserves are reduced for that portion that can be
recovered through liquidation of collateral. To the extent that these collateral
items prove to be worth less than the face or notional value, the Company may
incur additional losses. However, the Company believes that since the quality of
collateral funds are evaluated prior to the setting of loss reserves on a
case-by-case basis, any differences between face or notional value and ultimate
disposition value will generally be minor.
A summary of off-balance sheet collateral held by the Company as of December 31
is as follows:
December 31,
1998 1997
(Dollars in thousands)
----------------------------------
Off-Balance Sheet Collateral:
Irrevocable letters of credit $ 152,814 $ 160,845
Certificates of Deposit 22,352 25,480
Other Collateral 43,194 25,656
----------------- ----------------
Total Off-Balance Sheet Collateral $ 218,360 $ 211,981
================= ================
Trust deeds and mortgages on real property held as collateral are not reflected
in the above figures due to the inexact nature of their disposition values.
During 1998 and 1997, the Company received approximately 5.8% and 9% of its
total collateral recoveries from trust deeds and mortgages on real property.
<PAGE>
The Company's off-balance-sheet collateral, most notably irrevocable letters of
credit, is taken on behalf of principals located in every geographical region of
the country. The Company does not believe there to be noteworthy concentration
of credit risk in any single area.
(3) INVESTMENTS
A summary of net investment income is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
(Dollars in thousands)
----------------------------------------------------
<S> <C> <C> <C>
Gross investment income:
Fixed maturities $ 6,038 $ 5,918 $ 6,405
Equity securities 686 538 409
Cash and short-term investments 319 330 338
Investment expense (392) (390) (345)
----------------- ---------------- -----------------
Net investment income $ 6,651 $ 6,396 $ 6,807
================= ================ =================
Gross realized gains:
Fixed maturities $ 2,172 $ 1,542 $ 1,343
Equity securities 2,391 2,686 1,528
Other assets 980 - 53
Gross realized losses:
Fixed maturities (588) (403) (218)
Equity securities (555) (347) (358)
Other assets - (5) (147)
----------------- ---------------- -----------------
Net realized gains $ 4,400 $ 3,473 $ 2,201
================= ================ =================
</TABLE>
<PAGE>
A summary of the accumulated net unrealized gains (losses) on investments
carried at market and the applicable deferred Federal income taxes is shown
below:
December 31,
1998 1997
(Dollars in thousands)
----------------------------------
Gross unrealized gains:
Fixed maturities $ 3,019 $ 2,636
Equity securities 3,844 4,068
Other invested assets 389 639
Gross unrealized losses:
Fixed maturities (1,147) (406)
Equity securities (958) (398)
Other invested assets (72) -
---------------- -----------------
Gross unrealized gains on investments
carried at market 5,075 6,539
Deferred Federal income taxes (1,726) (2,223)
---------------- -----------------
Net unrealized gains, net of
deferred Federal income taxes $ 3,349 $ 4,316
================ =================
A summary of the net increase (decrease) in unrealized investment gains (losses)
less applicable deferred Federal income taxes is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
(Dollars in thousands)
----------------------------------------------------
<S> <C> <C> <C>
Fixed maturities, available-for-sale $ (358) $ 1,535 $ (1,704)
Common equity securities, available-for-sale (561) 879 503
Preferred equity securities, available-for-sale (223) (52) 175
Other invested assets (323) 457 88
----------------- ---------------- -----------------
Total (1,465) 2,819 (938)
Deferred Federal income taxes 498 (959) 320
----------------- ---------------- -----------------
Net increase (decrease) in unrealized investment
gains (losses), net of deferred Federal income
taxes $ (967) $ 1,860 $ (618)
================= ================ =================
</TABLE>
The Company's insurance subsidiaries are required to deposit securities in
several of the states in which it conducts business as a condition of licensure.
These investments are included in the "Fixed maturities" and "Short-term
investments" captions within the accompanying consolidated balance sheets. As of
December 31, 1998 and 1997, the market value of these deposits was approximately
$14,170,000 and $13,935,000, respectively.
<PAGE>
The amortized cost and estimated market values of investments in fixed
maturities are as follows:
<TABLE>
<CAPTION>
December 31, 1998
(Dollars in thousands)
----------------------------------------------------------------------
----------------- ----------------- ---------------- -----------------
Gross Gross
Amortized Cost Unrealized Gains Unrealized Estimated
Fixed maturities, available-for-sale Losses Market Value
----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Bonds:
U.S. Government $ 11,837 $ 574 $ - $ 12,411
Asset backed securities 2,289 65 (5) 2,349
Mortgage backed securities 23,158 170 (258) 23,070
States, municipalities and political
subdivisions 36,376 975 (22) 37,329
Industrial and miscellaneous 28,877 1,148 (817) 29,208
----------------- ----------------- ---------------- -----------------
Total 102,537 2,932 (1,102) 104,367
Redeemable preferred stock 2,613 87 (45) 2,655
Certificates of Deposit 205 - - 205
----------------- ----------------- ---------------- -----------------
Total $ 105,355 $ 3,019 $(1,147) $107,227
================= ================= ================ =================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
(Dollars in thousands)
----------------------------------------------------------------------
----------------- ----------------- ---------------- -----------------
Gross Gross
Amortized Cost Unrealized Gains Unrealized Estimated
Fixed maturities, available-for-sale Losses Market Value
----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Bonds:
U.S. Government $ 11,008 $ 309 $ (28) $ 11,289
Asset backed securities 3,287 56 (1) 3,342
Mortgage backed securities 17,647 131 (24) 17,754
States, municipalities and political
subdivisions 26,980 873 (8) 27,845
Industrial and miscellaneous 33,708 1,141 (332) 34,517
----------------- ----------------- ---------------- -----------------
Total 92,630 2,510 (393) 94,747
Redeemable preferred stock 3,791 126 (13) 3,904
Certificates of Deposit 95 - - 95
----------------- ----------------- ---------------- -----------------
Total $ 96,516 $ 2,636 $ (406) $ 98,746
================= ================= ================ =================
</TABLE>
<PAGE>
The amortized cost and estimated market value of fixed maturities at December
31, 1998, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties. Prepayment
assumptions for asset backed and mortgage backed securities are obtained from
broker dealer survey values or internal estimates. These assumptions are
consistent with the current interest rate and economic environment.
Maturity distribution of fixed maturities, Amortized Cost Estimated
available-for-sale: Market Value
(dollars in thousands)
----------------------------------
Due in 1 year or less $ 6,492 $ 6,519
Due after 1 year through 5 years 35,139 35,882
Due after 5 years through 10 years 35,064 35,234
Due after 10 years through 20 years 14,416 14,896
Due after 20 years 14,244 14,696
---------------- -----------------
Total bonds and sinking fund preferred stock $105,355 $107,227
================ =================
Proceeds from the sale of available-for-sale securities during 1998 and 1997
were $74,642,000 and $52,441,000, respectively. Gross gains of $4,563,000 and
$4,228,000 and gross losses of $1,143,000 and $750,000 were realized on those
sales in 1998 and 1997, respectively.
(4) FURNITURE, EQUIPMENT AND IMPROVEMENTS
Furniture, equipment and improvements are recorded at historical cost.
Depreciation and amortization of automobiles, furniture and equipment is
calculated using the straight-line method over estimated useful lives from 3 to
5 years. Amortization of leasehold improvements is calculated using the
straight-line method over the estimated useful lives of the assets or the term
of the lease, whichever is shorter.
Summary of Furniture, Equipment and Improvements:
December 31,
1998 1997
(Dollars in thousands)
----------------------------------
Automobiles $ 149 $ 149
Furniture 3,215 3,002
Equipment 11,522 9,605
Improvements 1,723 2,343
---------------- -----------------
Total fixed assets 16,609 15,099
Less accumulated depreciation (10,342) (9,744)
---------------- -----------------
Furniture, equipment and
improvements, net $ 6,267 $ 5,355
================ =================
<PAGE>
(5) INCOME TAXES
Amwest Insurance Group, Inc. and subsidiaries file a consolidated Federal income
tax return. A reconciliation of the corporate federal tax with the financial
statement effective tax for the years ended December 31, 1998, 1997 and 1996 are
as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
(Dollars in thousands)
----------------------------------------------------
<S> <C> <C> <C>
Computed tax expense at statutory rate $ 3,064 $ 2,528 $ (1,715)
Tax-advantaged interest income (595) (506) (616)
Change in valuation allowance - (652) -
State taxes 65 15 47
Bad debt expense - 291 (463)
Other, net 209 261 387
----------------- ---------------- -----------------
Total provision for income taxes (benefit) $ 2,743 $ 1,937 $ (2,360)
================= ================ =================
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax liability and the deferred tax asset at December 31, 1998
and 1997 are presented below.
Years ended December 31,
1998 1997
(Dollars in thousands)
-------------------------------
Deferred tax assets:
Unearned premiums $ 2,927 $ 2,718
Discount on loss reserves 1,068 1,202
Accrued vacation 309 266
Deferred compensation/ Accrued severance 224 173
Alternative minimum tax credit 667 1,268
Bad debt reserve 232 74
Other 191 92
------------- -----------------
Total gross deferred tax assets 5,618 5,793
------------- -----------------
Deferred tax liabilities:
Deferred policy acquisition costs (6,871) (7,242)
Unrealized investment gains (1,722) (2,220)
Fixed assets (75) (86)
Discount on salvage & subrogation reserves (74) (67)
Deductible receivables (44) (55)
Other (17) (48)
--------------- -----------------
Total gross deferred tax liabilities (8,803) (9,718)
--------------- -----------------
Total net deferred tax liability $ (3,185) $ (3,925)
=============== =================
At December 31, 1998, the Company has no net operating loss carryforwards
available.
<PAGE>
(6) RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The following table sets forth a reconciliation of the liability for losses and
loss adjustment expenses for the periods shown:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
(Dollars in thousands)
-----------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 39,523 $ 42,009 $ 31,915
Less: net reinsurance recoverable on unpaid loss and loss
adjustment expenses (6,185) (6,133) (7,669)
------------- ------------- -------------
Net balance at beginning of year 33,338 35,876 24,246
Provision for losses and loss adjustment expenses occurring in current
year 43,420 35,212 45,853
Increase (decrease) in estimated losses and loss adjustment expenses
for claims occurring in prior years (2,589) (555) 794
------------- ------------- -------------
40,831 34,657 46,647
------------- ------------- -------------
Losses and loss adjustment expense payments for claims occurring during:
Current year (24,992) (15,095) (21,638)
Prior years (16,770) (22,100) (13,379)
------------- ------------- -------------
(41,762) (37,195) (35,017)
------------- ------------- -------------
Net balance at end of year 32,407 33,338 35,876
Plus: net reinsurance recoverable on unpaid loss and loss
adjustment expenses 9,837 6,185 6,133
------------- ------------- -------------
Balance at end of year $42,244 $ 39,523 $ 42,009
============= ============= =============
</TABLE>
The increase or decrease in estimated losses and loss adjustment expenses
for losses occurring in prior years reflects the net effect of the resolution of
losses for other than full reserve value and subsequent readjustment of loss
values as of December 31 of the applicable years. The surety loss and loss
adjustment expense ratios remained constant at approximately 28% for 1997 and
1998. The 1998 ratio includes the impact of the excess of loss and the aggregate
stop loss reinsurance treaties. During 1998, $4,168,000 was ceded in premiums on
these treaties with $4,100,000 ceded in losses. In 1997, $2,987,000 was ceded in
premiums with no losses ceded to the reinsurers.
Competitive market conditions and the Company's ability to write surety bonds
for larger contractors has resulted, on many bonds, in the substitution of
indemnity agreements for liquid and non-liquid collateral. The Company, through
its ongoing reserve analysis, has estimated the benefit to be derived from such
agreements and reduced estimates of ultimate losses incurred accordingly. In the
fourth quarter of 1998, the Company increased its estimate of such "salvage and
subrogation" recoveries by approximately $5.4 million which is partially
attributable to salvage and subrogation on losses incurred during the fourth
quarter. The increase relates primarily to the 1998 and 1997 years and reflects
the Company's belief that the underlying data is maturing. Further, subsequent
collection efforts have proven prior estimates to be conservative. Since the
Company had also pierced it's aggregate excess contract in the fourth quarter,
the net benefit attributable to the increased "salvage and subrogation" estimate
was approximately $1,025,000.
<PAGE>
(7) REINSURANCE
The Company cedes insurance to reinsurers and the Small Business Administration
("SBA") under reinsurance treaties that cover individual risks or entire classes
of business. Although the ceding of insurance does not discharge the Company
from its primary liability to its bondholder, the insurance company that assumes
the coverage assumes the related liability, and it is the practice of insurers
for accounting purposes to treat reinsured risks, to the extent of the
reinsurance ceded, as though they were risks for which the original insurer is
not liable.
The Company evaluates and monitors the financial condition of its reinsurers in
order to minimize its exposure to significant losses from reinsurer
insolvencies. The reinsurance recoverables and ceded unearned premium reported
on the accompanying balance sheet would represent a liability of the Company if
all reinsurers were unable to meet existing obligations under reinsurance
agreements.
The following amounts represent premiums assumed and the deductions for
reinsurance ceded for the years ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
(Dollars in thousands)
---------------------------------------------------
<S> <C> <C> <C>
Net premiums written:
Direct $ 129,614 $ 107,015 $ 94,935
Assumed 3,205 1,076 2,307
Ceded (24,858) (8,057) (7,917)
---------------- ---------------- -----------------
Net premiums written $ 107,961 $ 100,034 $ 89,325
================ ================ =================
Net change in unearned premiums:
Direct $ (8,961) $ (8,706) $ 480
Assumed 484 632 (810)
Ceded 6,487 190 (1,112)
---------------- ---------------- -----------------
Net change in unearned premiums $ (1,990) $ (7,884) $ (1,442)
================ ================ =================
Net loss and loss adjustment expenses:
Direct $ 50,364 $ 36,038 $ 50,391
Assumed 2,058 995 445
Ceded (11,591) (2,376) (4,189)
---------------- ---------------- -----------------
Net losses and loss adjustment expenses $ 40,831 $ 34,657 $ 46,647
================ ================ =================
</TABLE>
<PAGE>
On the surety lines of business, the Company's subsidiaries maintain an excess
of loss reinsurance treaty with a group of reinsurers (the "Excess Treaty"). The
Excess Treaty may be canceled at the election of either party by providing
notice of cancellation 90 days prior to any anniversary (currently October 1),
however, the reinsurers would remain liable for covered losses incurred up to
the cancellation date. The amended Excess Treaty limits the Company's exposure
on any one principal (the person or entity for whose account the surety contract
is made, and whose debt or obligation is the subject of the surety contract) to
the first $2,000,000 of loss and to losses in excess of $20,000,000 for losses
incurred prior to October 1, 1998 and $25,000,000 for losses incurred
thereafter. Coverage is provided for most types of bonds which the Company
writes except SBA guaranteed bonds, which are not covered by the treaty. The
reinsurers' maximum exposure under the Excess Treaty is $26,000,000 of losses
discovered during any one contract period (October 1 to October 1) for the
1997-1998 contract year and $35,000,000 for the 1998-1999 contract year. The
Excess treaty also contains profit sharing provisions for the $4,000,000 excess
of $2,000,000 layer of the treaty, of which no amounts are currently accrued
based on experience of the treaty through December 31, 1998.
The Company, effective January 1, 1997, entered into an aggregate stop-loss
treaty with Underwriters Reinsurance Company (Barbados), Inc. which treaty was
renewed for the 1998 accident year. This contract has a limit of approximately
$7,000,000 of losses and loss adjustment expenses incurred for the 1998 accident
year. On the surety lines of business when losses and loss adjustment expenses
exceed 32.8% of net earned premiums and for all other lines when losses and loss
adjustment expenses exceed 67% of net earned premiums the reinsurer becomes
liable for losses. The Company has an option to increase the coverage by up to
$5,000,000 by payment of $1,000,000 prior to the incurrance of $2,500,000 in
ceded losses under the original treaty. At December 31, 1998 and 1997, the
Company ceded $2,533,000 and $0, respectively, in losses to the stop-loss
treaty.
The Company's insurance subsidiaries also issue contract bonds under the SBA
Surety Guarantee Program. Industry practice is to account for SBA guarantees as
reinsurance transactions. The purpose of the SBA Surety Guarantee Program is to
assist small contractors, who have not established credit or who fail to meet a
surety's normal underwriting standards, in obtaining bonds. An SBA guarantee
covers between 80% and 90% of the surety's liability up to $1,250,000 per bond.
The Company also purchased a quota share reinsurance treaty with Underwriters
Reinsurance Company, a New Hampshire domiciled reinsurer which was effective
July 1, 1998. This treaty cedes 15% of net surety written premium for all surety
written through Amwest Surety Insurance Company on a pro rata basis.
For its liability lines of business, the Company has reduced its exposure on any
one risk with the purchase of excess of loss reinsurance. The net retained
amount has varied by year, primarily based on the Company's surplus position.
Currently, the Company retains the first $400,000 on any one risk with the next
$600,000 ceded to a consortium of reinsurers led by Gerling Global Reinsurance
Corporation. From July 1, 1996 to June 30, 1997 the Company participated in this
treaty with a 10% share. The Company further reinsures $1,000,000 in excess of
$1,000,000 for its liability coverages including extra contractual obligations
and excess of policy limits exposures. The Company is also a party to a quota
share agreement with regards to its non-standard private passenger automobile
business. Under this agreement, the Company cedes 50% of its net liability on
all non-standard private passenger automobile coverages.
<PAGE>
For its commercial automobile property coverages, the Company generally retains
the first $200,000 on any one exposure and purchases excess of loss reinsurance
for $4,800,000 in excess of $200,000. Limits relating to its Hawaiian
homeowners, California homeowners and Florida homeowners programs differ from
the above. For Hawaiian homeowners, the Company participates in the Hawaii
Hurricane Relief Fund, and accordingly, its Hawaiian policies exclude wind
coverage over 75 miles per hour. For California homeowners, the Company is party
to a 75% quota share reinsurance agreement with a limit of $7,500,000 per
occurrence. For Florida homeowners, the Company is a party to a 75% quota share
reinsurance with a limit of 200% of the actual gross premiums written in any
policy year. Additionally, the Company participates in the Florida Hurricane
Catastrophe Fund as a 90% participant. Recoveries from this Fund are limited to
hurricanes and are based on a formula which utilizes, among other factors,
premiums written, industry premiums written, industry losses and amounts
available in the fund.
(8) RESTRICTIONS ON DIVIDENDS
As a holding company, the Company depends primarily on dividends from its
insurance subsidiaries for its cash flow requirements. The Company's insurance
subsidiaries are subject to state regulations which restrict their ability to
pay dividends. These regulations restrict the amount of stockholder dividends
which may be paid within any one year without the approval of the Department of
Insurance in their state of domicile. The Company's insurance subsidiaries are
domiciled in the state of Nebraska. The Nebraska Insurance Code provides that
amounts may be paid as dividends on an annual basis without prior approval up to
a maximum of the greater of (1) statutory net income, excluding realized capital
gains, for the preceding year plus any carryforward net income from the previous
two calendar years that have not already been paid out as dividends or (2) 10%
of statutory policyholders' surplus as of the preceding December 31. The amount
is further restricted to the amount of earned surplus as of December 31, 1998.
Amwest Surety and Condor can pay $7,987,000 and $0, respectively, in dividends
to the Company during 1998 without prior approval. For the years ended December
31, 1998, 1997 and 1996, Amwest Surety paid dividends of $0, $0 and $500,000,
respectively, to Amwest Insurance Group, Inc.
The Company's credit agreements also contain restrictions on the payment of
dividends (see Note 10).
<PAGE>
(9) STATUTORY ACCOUNTING PRINCIPLES FINANCIAL INFORMATION
The Company's insurance subsidiaries are required to file annual statements
with insurance regulatory authorities prepared on an accounting basis prescribed
or permitted by such authorities (statutory). Prescribed statutory accounting
practices include a variety of publications of the National Association of
Insurance Commissioners ("NAIC"), as well as state laws, regulations and general
administrative rules. Generally accepted accounting principles differ in certain
respects from these prescribed statutory accounting practices. The more
significant of these differences are (a) premium income is taken into earnings
over the periods covered by the policies, whereas the related acquisition and
commission costs are expensed when incurred; (b) all bonds and sinking fund
preferred stock are recorded at amortized cost, regardless of trading activity;
(c) non-admitted assets are charged directly against surplus; (d) loss reserves
and unearned premium reserves are stated net of reinsurance; (e) Federal income
taxes are recorded when payable; and (f) the outstanding contribution
certificate is included as a component of surplus, and the interest on the
outstanding contribution certificate is a direct charge to surplus.
Additionally, the cash flow presentation is not consistent with generally
accepted accounting principles and a reconciliation from net income to funds
provided by operations is not presented. Permitted statutory accounting
practices encompass all accounting practices not so prescribed. As of December
31, 1998, there were no material permitted statutory accounting practices
utilized by the insurance companies.
The NAIC membership adopted in March 1998, the Codification of Statutory
Accounting Principles Project as the NAIC supported basis of accounting, the
result of which is expected to constitute the only source of "prescribed"
statutory accounting practices. The Codification Project, which will become
effective on January 1, 1999, was approved with the provision for commissioner
discretion in the determination of appropriate statutory accounting for
insurers. Such discretion will continue to allow prescribed or permitted
accounting practices that may differ from state to state. Accordingly, this
project will change the definition of what comprises prescribed versus permitted
statutory accounting practices and may result in changes to the accounting
policies that insurance enterprises use to prepare their statutory financial
statements. The Company has not determined how implementation will affect its
statutory financial statements and is unable to predict how insurance rating
agencies will interpret or react to such changes. No assurance can be given that
future legislative or regulatory changes from such activities will not adversely
affect the Company.
Policyholders surplus and net income on a statutory basis is as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
Statutory Statutory Statutory Statutory Statutory Statutory
Policyholders Net Income Policyholders Net Income Policyholders Net Income
Surplus (Loss) Surplus (Loss) Surplus (Loss)
(Dollars in thousands)
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Amwest Surety $ 39,526 $ 7,624 $ 33,823 $ 3,528 $ 31,081 $ (3,803)
Far West 7,562 835 6,501 (461) 7,042 1,176
Condor 9,074 (767) 10,489 1,362 9,217 (1,707)
</TABLE>
<PAGE>
(10) BANK INDEBTEDNESS
On August 6, 1994, the Company entered into a revolving credit agreement with
Union Bank for $12,500,000. The debt agreement was amended on April 24, 1996,
July 10, 1996 and waived and amended as of September 30, 1997 and 1998 to
increase the amount available under the revolving line of credit from
$12,500,000 to $15,000,000 and to change certain covenants and payment
requirements. At December 31, 1998, $15,000,000 is available under the revolving
line of credit, $14,500,000 of which is currently utilized. The bank loan has a
variable rate based upon fluctuations in the London Interbank Offered Rate
(LIBOR) and amortizing principal payments. The interest rate at December 31,
1998 was 7.1%. The credit agreement contains certain financial covenants with
respect to capital expenditures, business acquisitions, liquidity ratio,
leverage ratio, tangible net worth, net profit and dividend payments. As of
December 31, 1998, the Company was in compliance with its debt covenants.
Balance
(Dollars in thousands)
-------------------------
Summary of debt maturity schedule:
September 30, 2000 $ 5,000
September 30, 2001 5,000
September 30, 2002 5,000
The bank loan has a variable interest rate which approximates the rates
currently available today. Accordingly, estimated fair value of the debt is
equal to the statement value of $14,500,000.
(11) OTHER LIABILITIES
The following table is a summary of other liabilities at December 31, 1998 and
1997:
December 31,
1998 1997
(Dollars in thousands)
----------------------------------
Accrued salaries, fringe benefits
and other compensation $ 3,098 $ 3,072
Premium taxes payable 898 986
General accounts payable 320 340
Notes payable 600 -
Dividends payable 391 379
Deferred compensation payable 660 510
Proposition 103 reserve 228 982
Commission payable 430 574
Other 1,273 1,647
---------------- -----------------
Total other liabilities $ 7,898 $ 8,490
================ =================
<PAGE>
(12) COMMITMENTS AND CONTINGENCIES
The Company is subject to certain claims arising in the ordinary course of its
operations. The Company believes that the ultimate resolution of such matters
will not materially affect its consolidated financial condition.
At December 31, 1998, the Company occupied office space under various operating
leases in addition to a leased mini-computer that have remaining noncancellable
lease terms in excess of one year. Rental expenses of approximately $3,369,000,
$3,648,000 and $5,647,000 for the years ended December 31, 1998, 1997 and 1996,
respectively, have been charged to operations in the accompanying consolidated
statements of operations.
Balance
(Dollars in thousands)
-------------------------
Summary of minimum future annual rental commitments:
1999 $ 2,554
2000 2,362
2001 1,950
2002 1,693
2003 and thereafter 9,004
-------------------------
Total $ 17,563
=========================
(13) RELATED PARTY TRANSACTIONS
Condor, since the commencement of insurance company operations in 1989, has
offered its monthly commercial automobile insurance policies to members of the
Waste Industry Loss Prevention and Safety Association (d.b.a. "The Safety
Association"), a related party. In order to accept monthly commercial automobile
coverage written by Condor, an applicant must become a member of The Safety
Association. Since 1981, the Company has had the exclusive right to provide
insurance programs to The Safety Association members. Effective June 30, 1998,
the Company purchased the Safety Association and merged its operations into
Condor. This acquisition was not material to the consolidated financial
statements.
(14) STOCK DIVIDEND
The Company paid a 10% stock dividend to stockholders of record as of March 31,
1998. All share and per share amounts included in the accompanying consolidated
financial statements and notes are based on the increased number of shares
giving retroactive effect to the stock dividend.
<PAGE>
(15) STOCKHOLDER RIGHTS PLAN
On May 10, 1989, the Board of Directors adopted a Stockholder Rights Plan and
declared a dividend of one Stock Purchase Right (a "Right") for each share of
common stock outstanding on May 22, 1989. Each Right becomes exercisable on the
tenth business day after a person or group (other than the Company and certain
related parties) has acquired or commenced a tender or exchange offer to acquire
20% or more of the Company's common stock, or upon consummation of certain
mergers, business combinations or sales of the Company's assets. If the Rights
become exercisable, a holder will be entitled to purchase in certain cases (i)
one one-hundredth of a share of Series A Junior Participating Preferred Stock,
$.01 par value, at the then current exercise price (initially $50), (ii) shares
of common stock, $.01 par value, having a market price equal to two times the
then current exercise price, or (iii) in case of a merger, common stock of the
acquiring corporation having a market value equal to two times the then current
exercise price.
The Company is entitled to redeem the Rights at $.01 per Right under certain
circumstances. The rights do not have voting or dividend rights, and cannot be
traded independently from the Company's common stock until such time as they
become exercisable.
(16) EMPLOYEE STOCK PURCHASE PLAN
The Company provides an employee stock purchase plan under Section 423 of the
Internal Revenue Code of 1986, as amended, to any employee who has a customary
working schedule of more than 20 hours per week and whose customary employment
is for more than five months in any calendar year. It excludes any employee who
own stock possessing 5% or more of the total combined voting power or value of
all classes of stock of the Company. Eligible employees are entitled to purchase
shares of the Company's common stock on a calendar month basis at 92% of the
fair market value of the Company's common stock on the last business day of a
calendar month.
(17) RETIREMENT PLAN
The Company has a 401(k) savings plan entitled the Amwest Surety Insurance
Company 401(k) Plan (the "Plan"). Employees eligible for participation in the
Plan must have attained one year of service and be at least 21 years of age. The
Plan provides for employer matching contributions at 50%, up to a maximum of the
first 6% of the employee contribution and become fully vested at the end of 5
years of employment. Total expense to the Company during 1998, 1997 and 1996
amounted to $423,000, $365,000 and $344,000, respectively.
<PAGE>
(18) STOCK OPTIONS
In May 1998, the stockholders approved the 1998 Stock Incentive Plan ("the
Plan") which replaced the existing Stock Option Plan and a Non-Employee Director
Stock Option Plan. The new Stock Incentive Plan reserved 250,000 shares of its
Common Stock, subject to adjustment for reorganizations, recapitalizations,
stock splits or similar events. As of December 31, 1998, 5,500 options had been
granted under this plan. Shares of Common Stock subject to the unexercised
portions of any options granted under the Plan which expire, terminate or are
canceled may again be subject to options under the Plan. The per share exercise
price of options under the Plan may not be less than 100% of the fair market
value of the underlying Common Stock on the date of the grant of the option
(110% of such fair market value with respect to Incentive Options granted to an
individual who owns more than 10% of the total combined voting power of all
classes of stock of the Company or any subsidiary or parent corporation). The
479,855 outstanding options from the Stock Option Plan and the Non-Employee
Director Stock Option Plan will remain in effect until exercised, canceled or
expired.
The Company accounts for its options under Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). As
permitted by FAS 123, the Company continued to use accounting methods presented
by Accounting Principles Board Opinion No. 25 and has expanded its disclosure of
stock-based compensation in the tables below. The additional compensation costs
that would have been recorded if the Company had adopted FAS 123 are not
material to the consolidated financial statements of the Company.
Transactions involving stock options during the years ended December 31, 1998,
1997 and 1996 are presented below:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------- --------------------------------- ---------------------------------
Weighted Average Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------------- ------------------ --------------- ----------------- --------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 493,003 $11.84 486,205 $11.45 361,845 $11.54
Granted 82,750 16.32 102,300 11.36 164,373 11.40
Exercised (73,788) 10.60 (78,210) 8.72 (7,645) 7.96
Canceled / Expired (16,610) 11.93 (17,292) 12.04 (32,368) 13.14
--------------- ------------------ --------------- ----------------- --------------- ------------------
Outstanding at
end of year 485,355 12.79 493,003 $11.84 486,205 $11.45
=============== ================== =============== ================= =============== ==================
Options exercisable
at end of year 293,217 12.43 261,543 $11.76 247,691 $10.58
=============== ================== =============== ================= =============== ==================
</TABLE>
<PAGE>
The following table summarizes information about options outstanding under the
Plans at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Outstanding Exercise Price
- ---------------------------- ---------------- ----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
$5.582 - $8.977 8,937 3.7 $ 7.42 8,937 $ 7.42
$9.432 - $12.745 254,693 7.2 11.75 152,899 11.91
$12.841 - $16.375 221,725 6.8 14.21 131,381 13.37
================ ================= ================= ================ =================
$5.582- $16.375 485,355 6.9 $ 12.79 293,217 $ 12.43
================ ================= ================= ================ =================
</TABLE>
Pro forma net income (loss) and earnings (loss) per share information, as
required by SFAS No. 123, has been calculated as if the Company had accounted
for options granted under the Plans under the fair value method. The fair value
of options granted was estimated as of the date of grant based on the
Black-Scholes option pricing model given the following weighted average
assumptions: risk-free interest rates of 5.64% for 1998, 6.34% and 6.67% for
1997 and 6.39% for 1996, a dividend yield of 2.76% for 1998, 3.12% for 1997 and
3.48% for 1996, volatility of the Company's Common Stock of 6.91% for 1998,
7.15% for 1997 and 7.18% for 1996, and an expected life of the stock options of
10 years. The weighted average grant date fair values of stock options granted
during 1998, 1997 and 1996 were $5.88, $4.92 and $5.09, respectively.
For purposes of pro forma disclosures, the estimated fair value is amortized on
a straight-line basis over the vested period.
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Net income (loss) As reported $6,269 $ 5,498 $ (2,686)
Pro forma 6,210 5,449 (2,720)
Diluted Earnings per share (1) As reported $ 1.59 $ 1.46 $ (.74)
Pro forma 1.58 1.45 (.75)
<FN>
(1) Amounts reflect 10% stock dividend effective March 31, 1998.
</FN>
</TABLE>
<PAGE>
(19) SEGMENT INFORMATION
The accounting policies of the segments are the same as those described in Note
1, "Summary of Significant Accounting Policies". Segments are determined based
on product categories. The Company evaluates performance based on underwriting
income or loss.
Reportable segments include Surety and Specialty Property & Casualty.
The Company's surety division underwrites a wide variety of surety bonds for
small to mid-sized surety accounts through independent agents and brokers.
Currently, the Company has the capacity to write bonds up to $25 million. In
order to protect the Company from major losses on the larger accounts, the
Company purchases reinsurance from a consortium of Treasury listed reinsurers.
Bonds are underwritten using a variety of factors to help mitigate risk,
including the acceptance of full or partial collateral and the usage of funds
control where appropriate.
The Company's property and casualty division primarily writes insurance packages
which consist principally of commercial automobile liability and physical damage
and, to a lesser extent, general liability and other related coverages for
insureds involved in general trucking including solid waste disposal, sand and
gravel, transit mix, logging, farm to market, intermodal trucking, less than
total load (LTL), newspaper distribution, tow truck and limousine services
industries. In addition to its commercial policies, the Company offers
non-standard private passenger automobile insurance in the states of Arizona and
California and homeowners coverage in the states of California, Florida and
Hawaii and motorcycle insurance in the state of New York.
Reportable segment data is as follows:
<TABLE>
<CAPTION>
Net Earned Premium Underwriting Income (Loss) Segment Assets (2)
(Dollars in thousands)
1998 1997 1996 1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Surety $84,166 $70,565 $65,501 $ 3,689 $ 1,395 $ (6,357) $47,634 $35,766 $30,939
Specialty
Property &
Casualty 21,805 21,585 22,382 (3,811) (1,863) (3,470) 14,541 8,792 7,085
------------ ----------- ------------ ----------- ------------ ------------ ----------- ------------ -----------
Total Segments
105,971 92,150 87,883 (122) (468) (9,827) 62,175 44,558 38,024
Corporate (1) - - - - - - 154,116 145,961 143,394
------------ ----------- ------------ ----------- ------------ ------------ ----------- ------------ -----------
Consolidated
Total $105,971 $92,150 $87,883 $ (122) $ (468) $ (9,827) $216,291 $190,519 $181,418
============ =========== ============ =========== ============ ============ =========== ============ ===========
<FN>
(1) Corporate assets include investments, cash and cash equivalents, accrued
investment income, furniture, equipment and improvements, income taxes
recoverable and other assets.
(2) Segment assets include agents' balances and premiums receivable,
reinsurance recoverable, ceded unearned premiums and deferred policy
acquisition expenses.
</FN>
</TABLE>
<PAGE>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION (UNAUDITED)
QUARTERLY FINANCIAL INFORMATION
The quarterly results for the years ended December 31, 1998, 1997 and 1996 are
set forth in the following table:
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
----------------- ---------------- ----------------- ----------------
First Second Quarter Third Fourth
Quarter Quarter Quarter
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
1998
Premiums written $29,342 $35,044 $34,687 $33,746
Net premiums earned 27,124 27,248 25,633 25,966
Net investment income 1,577 1,560 1,733 1,781
Net realized gains 820 1,065 1,901 614
Total revenues 29,521 29,873 29,267 28,361
Net income 2,056 975 2,098 1,140
Earnings per share - basic (1) .54 .25 .54 .29
Earnings per share - diluted (1) .53 .25 .53 .29
----------------- ---------------- ----------------- ----------------
First Second Quarter Third Fourth
Quarter Quarter Quarter
----------------- ---------------- ----------------- ----------------
1997
Premiums written $21,609 $28,175 $30,083 $28,224
Net premiums earned 21,446 21,781 23,736 25,187
Net investment income 1,681 1,605 1,594 1,516
Net realized gains 637 348 1,044 1,444
Total revenues 23,764 23,734 26,374 28,147
Net income 1,785 1,314 685 1,714
Earnings per share - basic (1) .49 .36 .18 .45
Earnings per share - diluted (1) .48 .35 .18 .45
----------------- ---------------- ----------------- ----------------
First Second Quarter Third Fourth
Quarter Quarter Quarter
----------------- ---------------- ----------------- ----------------
1996
Premiums written $23,208 $25,749 $24,719 $23,566
Net premiums earned 21,835 21,535 22,239 22,274
Net investment income 1,807 1,678 1,581 1,741
Net realized gains 1,025 517 325 334
Total revenues 24,667 23,730 24,145 24,349
Net income (loss) 86 (1,311) 1,191 (2,652)
Earnings (loss) per share - basic (1) .02 (.36) .33 (.73)
Earnings (loss) per share - diluted (1) .02 (.36) .32 (.73)
<FN>
(1) Amounts reflect a 10% stock dividend effective March 31, 1998.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE I
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
SUMMARY OF INVESTMENTS-
OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1998
(Dollars in thousands)
Column A Column B Column C Column D
Amount
as shown on
Type of investment Cost Value balance sheet
<S> <C> <C> <C>
Fixed Maturities:
Bonds:
United States Government and government
agencies and authorities $ 23,955 24,543 24,543
States, municipalities and political subdivisions 39,239 40,246 40,246
Foreign governments - - -
Public utilities 765 803 803
Convertibles and bonds with warrants attached - - -
All other corporate bonds 38,578 38,775 38,775
--------------- --------------- ---------------
Total bonds 102,537 104,367 104,367
Certificates of deposit 205 205 205
Redeemable preferred stock 2,613 2,655 2,655
--------------- --------------- ---------------
Total fixed maturities 105,355 107,227 107,227
Equity securities:
Common stocks:
Public utilities - - -
Banks, trust and insurance companies 1,754 3,256 3,256
Industrial, miscellaneous and all other 5,938 7,316 7,316
Non-redeemable preferred stocks 4,258 4,265 4,265
--------------- --------------- ---------------
Total equity securities 11,950 14,837 14,837
Mortgage loans on real estate - XXXXXXX -
Real estate - XXXXXXX -
Policy loans - XXXXXXX -
Other long-term investments 4,058 XXXXXXX 4,375
Short-term money-market investments 2,201 XXXXXXX 2,201
--------------- --------------- ---------------
Total investments $ 123,564 XXXXXXX $ 128,640
=============== =============== ===============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION (Parent Company Only)
STATEMENT OF OPERATIONS
(Dollars in thousands)
Year ended December 31,
1998 1997 1996
<S> <C> <C> <C>
REVENUES:
Equity in income (loss) of subsidiaries $ 6,083 $ 5,208 $ (969)
Commissions & fees 697 572 2
Net investment income - 32 65
Net realized gains (losses) 1,001 8 (5)
------------- ------------- -------------
Total revenues 7,781 5,820 (907)
EXPENSES:
Merger expenses - - 710
Lease termination cost - - 1,300
Interest expense 533 306 107
------------- ------------- -------------
Total expenses 533 306 2,117
Income before income taxes 7,248 5,514 (3,024)
Provision for income taxes (benefit) 979 16 (338)
------------- ------------- -------------
Net income (loss) $ 6,269 $ 5,498 $ (2,686)
============= ============= =============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II (continued)
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION (Parent Company Only)
BALANCE SHEETS
(Dollars in thousands)
December 31,
1998 1997
<S> <C> <C>
ASSETS:
Total investments $ 71,229 $ 66,989
Cash and cash equivalents 184 176
Income taxes receivable - 123
Deferred Federal income tax asset 84 523
Due from affiliates 642 76
Furniture, equipment and improvements 4,701 3,648
Other assets 976 1,071
------------- --------------
Total assets $ 77,816 $ 72,606
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Bank indebtedness $ 14,500 $ 14,500
Income tax payable 301 -
Other liabilities 1,113 927
------------- --------------
Total liabilities 15,914 15,427
------------- --------------
Stockholders' Equity:
Common stock and additional paid in capital 19,222 18,247
Net unrealized appreciation (depreciation) of investments,
net of taxes 3,349 4,316
Retained earnings 39,331 34,616
------------- --------------
Total stockholders' equity 61,902 57,179
------------- --------------
Total liabilities and stockholders' equity $ 77,816 $ 72,606
============= ==============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II (continued)
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION (Parent Company Only)
STATEMENT OF CASH FLOWS
(Dollars in thousands)
Year ended December 31,
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 6,269 $ 5,498 $ (2,686)
Less equity in income of subsidiary (6,083) (5,208) 969
------------ -------------- -------------
Net income from operations 186 290 (1,717)
Adjustments:
Change in income taxes, net 879 (92) 1,268
Change in accrued investment income - - 10
Change in due (to) from affiliates (566) (1,242) (270)
Change in other assets / liabilities 281 (320) 1,829
Dividend received from affiliate - - 500
Provision for depreciation and amortization 557 372 431
Realized (gains) losses on sale of investments (1,002) (8) 4
Realized loss on sale of fixed assets 5 46 36
------------ -------------- -------------
Net cash provided (used) 340 (954) 2,091
------------ -------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash received from investments sold, matured,
called or repaid 2,025 187 995
Cash paid for investments acquired (162) (17) (2,262)
Capital expenditures, net (1,616) (2,988) (14)
------------ -------------- -------------
Net cash provided (used) 247 (2,818) (1,281)
------------ -------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of surplus note from subsidiary - 1,000 1,000
Proceeds from issuance of long term debt - 2,000 -
Proceeds from common stock issuance 975 1,382 299
Repurchase of common stock - - (676)
Capital contribution to subsidiaries - - (1,000)
Dividends paid (1,554) (1,493) (1,462)
------------ -------------- -------------
Net cash from financing activities (579) 2,889 (1,839)
------------ -------------- -------------
Net increase (decrease) 8 (883) (1,029)
Cash and cash equivalents, beginning 176 1,059 2,088
------------ -------------- -------------
Cash and cash equivalents, ending $ 184 $ 176 $ 1,059
============ ============== =============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
SCHEDULE II (continued)
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION (Parent Company Only)
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying condensed financial statements include the accounts of
Amwest Insurance Group, Inc. (the "Parent Company"). The Parent
Company's wholly-owned subsidiaries, Amwest Surety Insurance Company,
Far West Insurance Company, Far West Bond Services, Condor Insurance
Company and Raven Claims Services, Inc. are not presented as
consolidated entities on these condensed financial statements.
2. Material Contingencies
The Parent Company is the subject of certain claims arising in the
ordinary course of its operations. The Parent Company believes that the
ultimate resolution of such matters will not materially affect its
financial condition.
3. Long-Term Obligations and Guarantees
On August 6, 1994, the Parent Company entered into a revolving credit
agreement with Union Bank for $12,500,000. The debt agreement was
amended on April 24, 1996, July 10, 1996, September 30, 1997 and again
on February 9, 1999 to increase the amount available under the
revolving line of credit from $12,500,000 to $15,000,000 and to change
certain covenants and payment requirements. At December 31, 1998,
$15,000,000 is available under the revolving line of credit,
$14,500,000 of which is currently utilized. The bank loan has a
variable rate based upon fluctuations in the London Interbank Offered
Rate (LIBOR) and amortizing principal payments.
4. Stock Dividend
The Company paid a 10% stock dividend to stockholders of record as of
March 31, 1998. The dividend was charged to retained earnings in the
amount of $5,424,000, which was based on the closing price of $15.625
per share of Common Stock on the declaration date. All share and per
share amounts included in the accompanying consolidated financial
statements and notes are based on the increased number of shares giving
retroactive effect to the stock dividend.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE III
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
December 31,
(Dollars in thousands)
Column A Column B Column C Column D Column E Column F Column G Column H Column I Column J Column K
Future
policy Other Benefits, Amortization
Deferred benefits, policy claims, of
policy losses, claims Net losses and deferred Other
acquis claims and Unearned and Premium investment settlement policy operating Premiums
Segment costs loss premiums benefits revenue income (1) expenses acquisition expenses written
expenses payable costs
As of and for the year ended December 31, 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Surety $ 19,636 $20,295 $ 47,650 - $ 84,166 $ 5,121 $ 23,262 $ 44,374 $ 12,841 $ 102,270
Specialty Property & 573 21,949 3,977 - 21,805 1,530 17,569 6,716 1,331 30,549
Casualty
---------------------------------------------------------------------------------------------------------------
Total $ 20,209 $ 42,244 $ 51,627 - $ 105,971 $ 6,651 $ 40,831 $ 51,090 $ 14,172 $ 132,819
---------------------------------------------------------------------------------------------------------------
As of and for the year ended December 31, 1997
Surety $ 21,042 $ 18,862 $ 40,249 - $ 70,565 $ 4,861 $ 20,013 $ 39,158 $ 9,999 $ 82,611
Specialty Property & 257 20,661 1,764 - 21,585 1,535 14,644 6,197 2,607 25,480
Casualty
---------------------------------------------------------------------------------------------------------------
Total $ 21,299 $ 39,523 $ 42,013 - $ 92,150 $ 6,396 $ 34,657 $ 45,355 $ 12,606 $ 108,091
---------------------------------------------------------------------------------------------------------------
As of and for the year ended December 31, 1996
Surety $ 16,099 $ 20,607 $ 32,878 - $ 65,501 $ 5,037 $ 27,836 $ 33,373 $ 10,346 $ 72,170
Specialty Property & 2 21,402 1,061 - 22,382 1,770 18,811 4,992 2,352 25,072
Casualty
---------------------------------------------------------------------------------------------------------------
Total $ 16,101 $ 42,009 $ 33,939 - $ 87,883 $ 6,807 $ 46,647 $ 38,365 $ 12,698 $ 97,242
---------------------------------------------------------------------------------------------------------------
<FN>
(1) Allocation based upon net premiums written
</FN>
</TABLE>
<PAGE>
The Board of Directors
Amwest Insurance Group, Inc.:
We consent to incorporation by reference in registration statements Nos.
33-11020, 33-24243 and 33-38128 on Form S-8 and in registration statements Nos.
33-28645, 33-37984, 333-61819 and 333-17109 on Form S-3 of Amwest Insurance
Group, Inc. of our reports dated February 3, 1998, relating to the consolidated
balance sheets of Amwest Insurance Group, Inc. and subsidiaries as of December
31, 1998 and 1997 and the related consolidated statements of operations and
comprehensive income, cash flows and changes in stockholders' equity and related
schedules for each of the years in the three-year period ended December 31,
1998, which reports appear in the December 31, 1998 annual report on Form 10-K
of Amwest Insurance Group, Inc.
KPMG LLP
Los Angeles, California
March 29, 1999
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Amwest Insurance Group, Inc.:
Under date of February 3, 1998, we reported on the consolidated balance sheets
of Amwest Insurance Group, Inc. and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of operations and comprehensive
income, cash flows and changes in stockholders' equity for each of the years in
the three-year period ended December 31, 1998, as contained in the annual report
on Form 10-K for the year 1998. In connection with our audits of the
aforementioned consolidated financial statements, we also have audited the
related consolidated financial statement schedules as listed in the accompanying
index. These financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statement schedules based on our audits.
In our opinion, the related financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
KPMG LLP
Los Angeles, California
February 3, 1999
WAIVER AND SECOND AMENDMENT
This Waiver and Second Amendment dated as of February 9, 1999
(the "Waiver and Amendment") to the Restated Revolving Credit Agreement
dated as of July 10, 1996, as amended by that certain Waiver and Amendment
No. 1 dated as of September 30, 1997, (the "Credit Agreement") between
Amwest Insurance Group, Inc. (the "Borrower") and Union Bank of
California, N.A. (the "Bank") is entered into between Borrower and Bank.
WHEREAS, the Borrower desires, and the Bank is willing upon the
terms and conditions hereinafter set
forth, to
(a) waive compliance with Section 2.12 Mandatory Commitment
Reductions, as amended, for the September 30, 1998 Revolving Commitment
Reduction Date, and
(b) amend the Credit Agreement to:
(i) modify Section 2.12 Mandatory Commitment
Reductions, and
(ii) reset Section 5.13 Policyholders' Surplus.
In consideration of the premises and the agreements, provisions
and covenants herein contained, the parties hereto hereby agree, on the
terms and subject to the conditions set forth herein, as follows.
Section 1. Waiver of Section 2.12 of the Credit Agreement. The
Bank hereby waives compliance with Section 2.12 Mandatory Commitment
Reductions for the September 30, 1998 Revolving Commitment Reduction Date
provided that the provisions of Section 2 following remain in full force
and effect.
Section 2. Amendment to Section 2.12 of the Credit Agreement.
Delete the table contained in Section 2.12 Mandatory Commitment Reductions
as amended in its entirety and replace it with the following table:
Revolving Commitment
Commitment Reduction Date Reduction
September 30, 1998 $0
September 30, 1999 $0
September 30, 2000 $5,000,000
September 30, 2001 $5,000,000
September 30, 2002 $5,000,000
Section 3. Amendment to Section 5.13 of the Credit Agreement. Delete
$30,000,000 from the third line of Section 5.13 Policyholders' Surplus and
replace it with "$32,500,000".
Section 4. Representations and Warranties. The Borrower represents and
warrants to the Borrower that:
(a) before and after giving effect to this Amendment, the
representations and warranties set forth in Article III of the Credit Agreement
are true and correct in all material respects with the same effect as if made on
the date hereof, except to the extent such representations and warranties
expressly relate to an earlier date.
(b) before and after giving effect to this Amendment, no Event of
Default or Default has occurred and is continuing.
Section 5. Conditions to Effectiveness. This Amendment shall become
effective as of the date first written above when the Bank shall have received
executed originals of the following-.
(a) the counterpart of this Amendment that bears the
signature of the Borrower,
(b) an Authorization to Obtain Credit, Grant Security,
Guarantee or Subordinate duly completed by the Borrower,
(c) an Alternative Dispute Resolution Agreement duly
completed by the Borrower,
(d) an Authorization to Obtain Credit, Grant Security,
Guarantee or Subordinate duly completed by Amwest Surety
Insurance Company,
(e) an Addendum to Authorization Letter of Credit Services
duly completed by Amwest Surety Insurance
Company, an Alternative Dispute Resolution Agreement
duly completed by Amwest Surety Insurance Company,
(g) an Authorization to Obtain Credit, Grant Security,
Guarantee or Subordinate duly completed by Far
West Insurance Company,
(h) an Addendum to Authorization Letter of Credit Services
duly completed by Far West Insurance Company,
(i) an Alternative Dispute Resolution Agreement duly
completed by Far West Insurance Company, and
(j) such other documents, certificates, opinions
and instruments in connection with this
Amendment No. 2 as it shall be reasonably
requested by the Bank.
Section 6. Expenses. The Borrower agrees to reimburse the
Bank for its out-of-pocket expenses in connection with the Amendment.
Section 7. Applicable Law. This Amendment shall be governed
by, and construed in accordance with, the laws of the State of California.
Section 8. Counterparts. This Amendment may be executed in two
or more counterparts, each of which shall constitute an original, but all
of which when taken together shall constitute but one contract.
Section 9. Credit Agreement. Except as specifically stated
herein, the provisions of the Credit Agreement are and shall remain in
full force and effect.
In witness whereof, the parties hereto have caused this Amendment
to be duly executed by their respective authorized officers as of the day
and year first written above.
AMWEST INSURANCE GROUP, INC.
by:
Name: Steven R. Kay
Title: Senior Vice President and Chief Financial Officer
UNION BANK OF CALIFORNIA, N.A.
by:
Name: James R. Fothergill
Title: Vice President
Contingent Excess of Loss
Reinsurance Contract
Effective: July 1, 1998
issued to
Condor Insurance Company
Amwest Surety Insurance Company
and
Far West Insurance Company
all of Omaha, Nebraska
(hereinafter referred to collectively as the "Company")
by
The Subscribing Reinsurer(s) Executing the
Interests and Liabilities Agreement(s)
Attached Hereto
(hereinafter referred to as the "Reinsurer")
Article I - Classes of Business Reinsured
A. By this Contract the Reinsurer agrees to reinsure the excess liability
which may accrue to the Company under its policies, contracts and binders
of insurance or reinsurance (hereinafter called "policies") issued or
renewed on or after the effective date hereof, and classified by the
Company as the following:
1. Casualty business, including but not limited to Commercial
Automobile Liability and General Liability;
2. Extra contractual obligations and/or loss in excess of policy limits
arising under events from Private Passenger Auto, Homeowners, Mobile
Homeowners and Motorcycle business;
subject to the terms, conditions and limitations hereinafter set forth.
B. It is understood that the classes of business reinsured under this Contract
are deemed to include:
1. Coverages required for non-resident drivers under the motor vehicle
financial responsibility law or the motor vehicle compulsory
insurance law or any similar law of any state or province,
following the provisions of the Company's
policies when they include or are deemed to include so-called "Out
of State Insurance" provisions;
2. Coverages required under Section 30 of the Motor Carrier Act of
1980 and/or any amendments thereto.
Article II - Term
A. This Contract shall become effective on July 1, 1998, with respect to
losses under policies allocated to this Contract in accordance with the
provisions of paragraph C below, and shall continue in force until June
30, 1999, both days inclusive.
B. Unless the Company elects to reassume the ceded unearned
premium in force on the effective date of expiration, and so
notifies the Reinsurer prior to or as promptly as possible
after the effective date of expiration, reinsurance
hereunder on business in force on the effective date of
expiration shall remain in full force and effect until
expiration, cancellation or next premium anniversary date of
such business, whichever first occurs, but in no event
beyond 12 months following the effective date of expiration.
This limitation, however, shall not apply to any extended
reporting period provisions. It is understood and agreed
that the term "premium anniversary date" shall mean the
month and day of the year on which the Company issued the
original policy.
C. Notwithstanding the provisions of paragraph B above, policies shall be
allocated to this Contract if this Contract is in effect as of:
1. As respects all new policies, the effective date of such policies;
2. As respects monthly continuous policies, the monthly renewal date of
such policies;
3. As respects all other term policies not greater than 12 months, the
premium anniversary date of such policies;
4. As respects all term policies greater than 12 months, the premium
anniversary date of such policies.
All premiums and losses (and related loss adjustment expenses) from
policies allocated to this Contract shall be credited or charged,
respectively, to this Contract, regardless of the date said premiums earn
or such losses occur (or the date said claims are made or reported, as
respects claims made policies). Premiums, losses and related loss
adjustment expenses for any extended reporting period provisions shall be
allocated to this Contract if the original policy was allocated to this
Contract.
Article III - Territory
This Contract shall only apply to policies issued to insureds domiciled in the
United States of America, its territories and possessions, Puerto Rico and the
District of Columbia; but this limitation shall not apply to losses if the
Company's policies provide coverage outside the aforesaid territorial limits.
Article IV - Exclusions
A. This Contract does not apply to and specifically excludes the following:
1. All reinsurance assumed other than reinsurance which covers business
underwritten by the Company.
2. Business written by the Company on a co-indemnity basis where the
Company is not the controlling carrier.
3. All liability of the Company arising by contract, operation
of law, or otherwise, from its participation or membership,
whether voluntary or involuntary, in any insolvency fund.
"Insolvency fund" includes any guaranty fund, insolvency
fund, plan, pool, association, fund or other arrangement,
however denominated, established or governed, which provides
for any assessment of or payment or assumption by the
Company of part or all of any claim, debt, charge, fee or
other obligation of an insurer, or its successors or
assigns, which has been declared by any competent authority
to be insolvent, or which is otherwise deemed unable to meet
any claim, debt, charge, fee or other obligation in whole or
in part.
4. Pollution as excluded by the underlying Policy - "Pollution
Exclusion - Absolute"; if not present, then deemed to be. However,
this exclusion shall not apply to Environmental Restoration
Coverages provided under MCS 90 Endorsement, which is required for
those insureds maintaining ICC filings, or to the Company
endorsement CA 99 48 as respects business classified by the Company
as residential trash haulers.
5. Hazardous Waste Operations (except when exposure is unknown or
unintended).
6. Liability as a member, subscriber or reinsurer of any Pool,
Syndicate or Association, but this exclusion shall not apply to
Assigned Risk Plans or similar plans.
7. Nuclear risks as defined in the "Nuclear Incident Exclusion Clause -
Liability - Reinsurance"
attached to and forming part of this Contract.
8. Automobile Liability Insurance relating to the ownership,
maintenance, or use of trucks used for transporting commodities such
as explosives, munitions, gasoline, or liquefied petroleum gas
(LPG), including butane and propane. It is understood and agreed
that this exclusion shall not apply to those insureds involved in
the removal of soils saturated with gasoline or petroleum products.
B. If the Company is bound, without the knowledge and contrary to the
instructions of the Company's supervisory underwriting personnel, on any
business falling within the scope of one or more of the exclusions set
forth in paragraph A above, the exclusion shall be suspended with respect
to such business until 30 days after an underwriting supervisor of the
Company acquires knowledge thereof.
C. If the Company is required to accept an assigned risk which conflicts with
one or more of the exclusions set forth in paragraph A above, reinsurance
shall apply, but only for the difference between the Company's retention
and the minimum limit required by the applicable state statute, and in no
event shall the Reinsurer's liability exceed the limits set forth in
Article V.
Article V - Retention and Limit
A. Coverage A: As respects Casualty business, including but not limited to
Commercial Automobile Liability and General Liability business subject to
this Contract, the Company shall retain and be liable for the first
$1,000,000 of ultimate net loss (whether involving any one or any
combination of the classes of business covered hereunder) arising out of
any one occurrence. The Reinsurer shall then be liable for the amount by
which such ultimate net loss exceeds the Company's retention, but the
liability of the Reinsurer shall not exceed $1,000,000 as respects any one
occurrence, nor shall it exceed $3,000,000 as respects all losses arising
out of occurrences commencing during the term of this Contract.
B. Coverage B: As respects extra contractual obligations and/or loss
in excess of policy limits arising under events from Private Passenger
Auto, Homeowners, Mobile Homeowners and Motorcycle business subject to this
Contract, the Company shall retain and be liable for the first $250,000 of
ultimate net loss (whether involving any one or any combination of the
classes of business covered hereunder) arising out of any one occurrence.
The Reinsurer shall then be liable for the amount by which such ultimate
net loss exceeds the Company's retention, but the liability of the
Reinsurer shall not exceed $750,000 as respects any one occurrence, nor
shall it exceed $2,250,000 as respects all extra contractual obligations
and/or loss in excess of policy limits arising during the term of this
Contract.
It is understood that the ultimate net loss referred to in this paragraph
B shall be made up only of extra contractual obligations and loss in
excess of policy limits.
C. The Company shall purchase or be deemed to have purchased inuring
reinsurance to limit its ultimate net loss under any one policy subject to
Coverage A (exclusive of loss in excess of policy limits or extra
contractual obligations) to $1,000,000 each occurrence, Combined Single
Limit.
D. The amount shown in paragraph C above shall be extended to follow the
Company's policy if the Company's ultimate net loss is greater than said
amount because its policy includes or is deemed to include:
1. So-called "Out of State Insurance" provisions;
2. Limits of liability required under Section 30 of the Motor Carrier
Act of 1980 and/or any amendments
thereto.
Article VI - Definitions
A. "Ultimate net loss" as used herein is defined as the sum or
sums (including loss in excess of policy limits, extra contractual
obligations and any loss adjustment expense, as hereinafter defined,
which reduces the Company's limit of liability under the policy
involved) paid or payable by the Company in settlement of claims and
in satisfaction of judgments rendered on account of such claims, after
deduction of all salvage, all recoveries and all claims on inuring
insurance or reinsurance, whether collectible or not. Nothing herein
shall be construed to mean that losses under this Contract are not
recoverable until the Company's ultimate net loss has been
ascertained.
B. "Loss in excess of policy limits" and "extra contractual obligations" as
used herein shall be defined as follows:
1. "Loss in excess of policy limits" shall mean 90.0% of any amount
paid or payable by the Company in excess of its policy limits, but
otherwise within the terms of its policy, as a result of an action
against it by its insured or its insured's assignee to recover
damages the insured is legally obligated to pay to a third party
claimant because of the Company's alleged or actual negligence or
bad faith in rejecting a settlement within policy limits, or in
discharging its duty to defend or prepare the defense in the trial
of an action against its insured, or in discharging its duty to
prepare or prosecute an appeal consequent upon such an action.
2. "Extra contractual obligations" shall mean 90.0% of any punitive,
exemplary, compensatory or consequential damages, other than loss in
excess of policy limits, paid or payable by the Company as a result
of an action against it by its insured, its insured's assignee or a
third party claimant, which action alleges negligence or bad faith
on the part of the Company in handling a claim under a policy
subject to this Contract. An extra contractual obligation shall be
deemed to have occurred on the same date as the loss covered or
alleged to be covered under the policy.
Notwithstanding anything stated herein, this Contract shall not apply to
any loss in excess of policy limits or any extra contractual obligation
incurred by the Company as a result of any fraudulent and/or criminal act
by any officer or director of the Company acting individually or
collectively or in collusion with any individual or corporation or any
other organization or party involved in the presentation, defense or
settlement of any claim covered hereunder.
C. "Loss adjustment expense" as used herein shall mean expenses allocable to
the investigation, defense and/or settlement of specific claims, including
litigation expenses, interest on judgments, and legal expenses incurred in
connection with coverage questions and legal actions connected thereto,
but not including office expenses or salaries of the Company's regular
employees.
D. "Occurrence" as used herein shall follow the definition of "loss" or
"occurrence," as elected by the Company, under the applicable original
policy.
Article VII - Claims and Loss Adjustment Expense
A. Whenever a claim is reserved by the Company for an amount
greater than its retention hereunder and/or whenever a claim appears
likely to result in a claim under this Contract, the Company shall
notify the Reinsurer. Further, the Company shall notify the Reinsurer
whenever a claim involves a fatality, amputations or permanent loss of
use of upper or lower extremities, spinal injuries resulting in
partial or total paralysis of upper or lower extremities, brain
injuries resulting in impairment of physical functions, severe burn
cases, or any other injuries likely to result in a permanent
disability rating of 50.0% or more, regardless of liability, if the
policy limits or statutory benefits applicable to the claim are
greater than the Company's retention hereunder. The Reinsurer shall
have the right to participate, at its own expense, in the defense or
control of any claim or suit or proceeding involving this reinsurance.
B. All claim settlements made by the Company, provided they are within the
terms of this Contract, shall be binding upon the Reinsurer, and the
Reinsurer agrees to pay all amounts for which it may be liable upon
receipt of reasonable evidence of the amount paid by the Company.
C. In the event of loss hereunder, loss adjustment expense
incurred by the Company in connection therewith which does not reduce
the Company's limit of liability under the policy involved shall be
shared by the Company and the Reinsurer in the proportion the ultimate
net loss paid or payable by the Reinsurer bears to the total loss paid
or payable by the Company, prior to any reinsurance recoveries, but
after deduction of all salvage, subrogation and other recoveries.
However, if a verdict or judgment is reduced by any process other than
by the trial court, resulting in an ultimate saving to the Reinsurer,
or a judgment is reversed outright, the expenses incurred in securing
such reduction or reversal shall be shared by the Company and the
Reinsurer in the proportion that each benefits from such reduction or
reversal, and the expenses incurred up to the time of the original
verdict or judgment which do not reduce the Company's limit of
liability under the policy involved shall be shared in proportion to
each party's interest in such original verdict or judgment. The
Reinsurer's liability for such loss adjustment expense shall be in
addition to its liability for ultimate net loss.
Article VIII - Other Reinsurance
A. The Company shall be permitted to carry underlying reinsurance, recoveries
under which shall inure solely to the benefit of the Company and be
entirely disregarded in applying all of the provisions of this Contract.
B. The Company shall maintain in force excess of loss reinsurance for
$600,000 in excess of $400,000 any one occurrence, any one policy,
recoveries under which shall inure to the benefit of this Contract only
with respect to claims which do not involve extra contractual obligations
or loss in excess of policy limits.
Article IX - Premium
A. As premium for the reinsurance provided hereunder, the Company shall pay
the Reinsurer .54% of its net written premium for the term of this
Contract, subject to a minimum premium of $126,000.
B. The Company shall pay the Reinsurer a deposit premium of $140,000 in four
equal installments of $35,000 on the first day of each calendar quarter
during the term of this Contract.
C. Within 45 days after the expiration of this Contract, the Company shall
report the premium due hereunder determined in accordance with paragraph A
above. Any additional premium due the Reinsurer or return premium due the
Company shall be promptly remitted.
D. "Net written premium" as used herein is defined as gross written premium
of the Company for the classes of business reinsured hereunder, less
cancellations and return premiums, and less premiums ceded by the Company
for reinsurance which inures to the benefit of this Contract or for
reinsurance which increases the Company's available capacity.
E. Within 45 days after the end of each calendar quarter, the Company shall
report to the Reinsurer the unearned reinsurance premium as of the end of
the calendar quarter.
F. The Company shall furnish the Reinsurer with such information as the
Reinsurer may require to complete its Annual Convention Statement.
Article X - Offset (BRMA 36C)
The Company and the Reinsurer shall have the right to offset any balance or
amounts due from one party to the other under the terms of this Contract. The
party asserting the right of offset may exercise such right any time whether the
balances due are on account of premiums or losses or otherwise.
Article XI - Salvage and Subrogation
The Reinsurer shall be credited with salvage (i.e., reimbursement obtained or
recovery made by the Company, less the actual cost, excluding salaries of
officials and employees of the Company and sums paid to attorneys as retainer,
of obtaining such reimbursement or making such recovery) on account of claims
and settlements involving reinsurance hereunder. Salvage thereon shall always be
used to reimburse the excess carriers in the reverse order of their priority
according to their participation before being used in any way to reimburse the
Company for its primary loss. The Company hereby agrees to enforce its rights to
salvage or subrogation relating to any loss, a part of which loss was sustained
by the Reinsurer, and to prosecute all claims arising out of such rights.
Article XII - Access to Records (BRMA 1D)
The Reinsurer or its designated representatives shall have access at any
reasonable time to all records of the Company which pertain in any way to this
reinsurance.
Article XIII - Liability of the Reinsurer
A. The liability of the Reinsurer shall follow that of the Company in every
case and be subject in all respects to all the general and specific
stipulations, clauses, waivers and modifications of the Company's policies
and any endorsements thereon. However, in no event shall this be construed
in any way to provide coverage outside the terms and conditions set forth
in this Contract.
B. Nothing herein shall in any manner create any obligations or establish any
rights against the Reinsurer in favor of any third party or any persons
not parties to this Contract.
Article XIV - Net Retained Lines (BRMA 32E)
A. This Contract applies only to that portion of any policy which the Company
retains net for its own account (prior to deduction of any underlying
reinsurance specifically permitted in this Contract), and in calculating
the amount of any loss hereunder and also in computing the amount or
amounts in excess of which this Contract attaches, only loss or losses in
respect of that portion of any policy which the Company retains net for
its own account shall be included.
B. The amount of the Reinsurer's liability hereunder in respect of any loss
or losses shall not be increased by reason of the inability of the Company
to collect from any other reinsurer(s), whether specific or general, any
amounts which may have become due from such reinsurer(s), whether such
inability arises from the insolvency of such other reinsurer(s) or
otherwise.
Article XV - Errors and Omissions (BRMA 14F)
Inadvertent delays, errors or omissions made in connection with this Contract or
any transaction hereunder shall not relieve either party from any liability
which would have attached had such delay, error or omission not occurred,
provided always that such error or omission is rectified as soon as possible
after discovery.
Article XVI - Currency (BRMA 12A)
A. Whenever the word "Dollars" or the "$" sign appears in this Contract, they
shall be construed to mean United States Dollars and all transactions
under this Contract shall be in United States Dollars.
B. Amounts paid or received by the Company in any other currency shall be
converted to United States Dollars at the rate of exchange at the date
such transaction is entered on the books of the Company.
Article XVII - Taxes (BRMA 50B)
In consideration of the terms under which this Contract is issued, the Company
will not claim a deduction in respect of the premium hereon when making tax
returns, other than income or profits tax returns, to any state or territory of
the United States of America or the District of Columbia.
Article XVIII - Federal Excise Tax (BRMA 17A)
(Applicable to those reinsurers, excepting Underwriters at Lloyd's London and
other reinsurers exempt from Federal Excise Tax, who are domiciled outside the
United States of America.)
A. The Reinsurer has agreed to allow for the purpose of paying the Federal
Excise Tax the applicable percentage of the premium payable hereon (as
imposed under Section 4371 of the Internal Revenue Code) to the extent
such premium is subject to the Federal Excise Tax.
B. In the event of any return of premium becoming due hereunder the Reinsurer
will deduct the applicable percentage from the return premium payable
hereon and the Company or its agent should take steps to recover the tax
from the United States Government.
Article XIX - Unearned Premium and Loss Reserves
A. If the Reinsurer is unauthorized in any state of the United States of
America or the District of Columbia or the Reinsurer has an A. M. Best
rating equal to or below B++, the Reinsurer agrees to fund its share of
the Company's ceded unearned premium and outstanding loss and loss
adjustment expense reserves (including incurred but not reported loss
reserves) by:
1. Clean, irrevocable and unconditional letters of credit issued and
confirmed, if confirmation is required by the insurance regulatory
authorities involved, by a bank or banks meeting the NAIC Securities
Valuation Office credit standards for issuers of letters of credit
and acceptable to said insurance regulatory authorities; and/or
2. Escrow accounts for the benefit of the Company; and/or
3. Cash advances;
if, without such funding, a penalty would accrue to the Company on any
financial statement it is required to file with the insurance regulatory
authorities involved. The Reinsurer, at its sole option, may fund in other
than cash if its method and form of funding are acceptable to the
insurance regulatory authorities involved.
B. With regard to funding in whole or in part by letters of
credit, it is agreed that each letter of credit will be in a form
acceptable to insurance regulatory authorities involved, will be
issued for a term of at least one year and will include an "evergreen
clause," which automatically extends the term for at least one
additional year at each expiration date unless written notice of
non-renewal is given to the Company not less than 30 days prior to
said expiration date. The Company and the Reinsurer further agree,
notwithstanding anything to the contrary in this Contract, that said
letters of credit may be drawn upon by the Company or its successors
in interest at any time, without diminution because of the insolvency
of the Company or the Reinsurer, but only for one or more of the
following purposes:
1. To reimburse itself for the Reinsurer's share of unearned premiums
returned to insureds on account of policy cancellations, unless paid
in cash by the Reinsurer;
2. To reimburse itself for the Reinsurer's share of losses and/or loss
adjustment expense paid under the terms of policies reinsured
hereunder, unless paid in cash by the Reinsurer;
3. To reimburse itself for the Reinsurer's share of any other amounts
claimed to be due hereunder, unless paid in cash by the Reinsurer;
4. To fund a cash account in an amount equal to the Reinsurer's share
of any ceded unearned premium and/or outstanding loss and loss
adjustment expense reserves (including incurred but not reported
loss reserves) funded by means of a letter of credit which is under
non-renewal notice, if said letter of credit has not been renewed or
replaced by the Reinsurer 10 days prior to its expiration date;
5. To refund to the Reinsurer any sum in excess of the actual amount
required to fund the Reinsurer's share of the Company's ceded
unearned premium and/or outstanding loss and loss adjustment expense
reserves (including incurred but not reported loss reserves), if so
requested by the Reinsurer.
In the event the amount drawn by the Company on any letter of credit is in
excess of the actual amount required for B(1), B(2) or B(4), or in the
case of B(3), the actual amount determined to be due, the Company shall
promptly return to the Reinsurer the excess amount so drawn.
Article XX - Insolvency
A. In the event of the insolvency of one or more of the reinsured
companies, this reinsurance shall be payable directly to the company
or to its liquidator, receiver, conservator or statutory successor
immediately upon demand, with reasonable provision for verification,
on the basis of the liability of the company without diminution
because of the insolvency of the company or because the liquidator,
receiver, conservator or statutory successor of the company has failed
to pay all or a portion of any claim. It is agreed, however, that the
liquidator, receiver, conservator or statutory successor of the
company shall give written notice to the Reinsurer of the pendency of
a claim against the company indicating the policy or bond reinsured
which claim would involve a possible liability on the part of the
Reinsurer within a reasonable time after such claim is filed in the
conservation or liquidation proceeding or in the receivership, and
that during the pendency of such claim, the Reinsurer may investigate
such claim and interpose, at its own expense, in the proceeding where
such claim is to be adjudicated, any defense or defenses that it may
deem available to the company or its liquidator, receiver, conservator
or statutory successor. The expense thus incurred by the Reinsurer
shall be chargeable, subject to the approval of the Court, against the
company as part of the expense of conservation or liquidation to the
extent of a pro rata share of the benefit which may accrue to the
company solely as a result of the defense undertaken by the Reinsurer.
B. Where two or more reinsurers are involved in the same claim and a majority
in interest elect to interpose defense to such claim, the expense shall be
apportioned in accordance with the terms of this Contract as though such
expense had been incurred by the company.
C. It is further understood and agreed that, in the event of the
insolvency of one or more of the reinsured companies, the reinsurance
under this Contract shall be payable directly by the Reinsurer to the
company or to its liquidator, receiver or statutory successor, except
as provided by Section 4118(a) of the New York Insurance Law or except
(1) where this Contract specifically provides another payee of such
reinsurance in the event of the insolvency of the company or (2) where
the Reinsurer with the consent of the direct insured or insureds has
assumed such policy obligations of the company as direct obligations
of the Reinsurer to the payees under such policies and in substitution
for the obligations of the company to such payees.
Article XXI - Arbitration
A. As a condition precedent to any right of action hereunder, in
the event of any dispute or difference of opinion hereafter arising
with respect to this Contract, it is hereby mutually agreed that such
dispute or difference of opinion shall be submitted to arbitration.
One Arbiter shall be chosen by the Company, the other by the
Reinsurer, and an Umpire shall be chosen by the two Arbiters before
they enter upon arbitration, all of whom shall be active or retired
disinterested executive officers of insurance or reinsurance companies
or Lloyd's London Underwriters. In the event that either party should
fail to choose an Arbiter within 30 days following a written request
by the other party to do so, the requesting party may choose two
Arbiters who shall in turn choose an Umpire before entering upon
arbitration. If the two Arbiters fail to agree upon the selection of
an Umpire within 30 days following their appointment, each Arbiter
shall nominate three candidates within 10 days thereafter, two of whom
the other shall decline, and the decision shall be made by drawing
lots.
B. Each party shall present its case to the Arbiters within 30 days following
the date of appointment of the Umpire. The Arbiters shall consider this
Contract as an honorable engagement rather than merely as a legal
obligation and they are relieved of all judicial formalities and may
abstain from following the strict rules of law. The decision of the
Arbiters shall be final and binding on both parties; but failing to agree,
they shall call in the Umpire and the decision of the majority shall be
final and binding upon both parties. Judgment upon the final decision of
the Arbiters may be entered in any court of competent jurisdiction.
C. If more than one reinsurer is involved in the same dispute, all such
reinsurers shall constitute and act as one party for purposes of this
Article and communications shall be made by the Company to each of the
reinsurers constituting one party, provided, however, that nothing herein
shall impair the rights of such reinsurers to assert several, rather than
joint, defenses or claims, nor be construed as changing the liability of
the reinsurers participating under the terms of this Contract from several
to joint.
D. Each party shall bear the expense of its own Arbiter, and shall jointly
and equally bear with the other the expense of the Umpire and of the
arbitration. In the event that the two Arbiters are chosen by one party,
as above provided, the expense of the Arbiters, the Umpire and the
arbitration shall be equally divided between the two parties.
E. Any arbitration proceedings shall take place at El Segundo, California
unless otherwise mutually agreed upon by the parties to this Contract, but
notwithstanding the location of the arbitration, all proceedings pursuant
hereto shall be governed by the law of the state in which the Company has
its principal office.
Article XXII - Service of Suit (BRMA 49C)
(Applicable if the Reinsurer is not domiciled in the United States of America,
and/or is not authorized in any State, Territory or District of the United
States where authorization is required by insurance regulatory authorities)
A. It is agreed that in the event the Reinsurer fails to pay any amount
claimed to be due hereunder, the Reinsurer, at the request of the Company,
will submit to the jurisdiction of a court of competent jurisdiction
within the United States. Nothing in this Article constitutes or should be
understood to constitute a waiver of the Reinsurer's rights to commence an
action in any court of competent jurisdiction in the United States, to
remove an action to a United States District Court, or to seek a transfer
of a case to another court as permitted by the laws of the United States
or of any state in the United States.
B. Further, pursuant to any statute of any state, territory or district of
the United States which makes provision therefor, the Reinsurer hereby
designates the party named in its Interests and Liabilities Agreement, or
if no party is named therein, the Superintendent, Commissioner or Director
of Insurance or other officer specified for that purpose in the statute,
or his successor or successors in office, as its true and lawful attorney
upon whom may be served any lawful process in any action, suit or
proceeding instituted by or on behalf of the Company or any beneficiary
hereunder arising out of this Contract.
Article XXIII - Agency Agreement
If more than one reinsured company is named as a party to this Contract, the
first named company shall be deemed the agent of the other reinsured companies
for purposes of sending or receiving notices required by the terms and
conditions of this Contract, and for purposes of remitting or receiving any
monies due any party.
Article XXIV - Intermediary (BRMA 23A)
E. W. Blanch Co. is hereby recognized as the Intermediary negotiating this
Contract for all business hereunder. All communications (including but not
limited to notices, statements, premium, return premium, commissions, taxes,
losses, loss adjustment expense, salvages and loss settlements) relating thereto
shall be transmitted to the Company or the Reinsurer through E. W. Blanch Co.,
Reinsurance Services, 3500 West 80th Street, Minneapolis, Minnesota 55431.
Payments by the Company to the Intermediary shall be deemed to constitute
payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be
deemed to constitute payment to the Company only to the extent that such
payments are actually received by the Company.
In Witness Whereof, the Company by its duly authorized representative has
executed this Contract as of the date undermentioned at:
Calabasas, California, this _______ day of ________________________199___.
--------------------------------------------------
Condor Insurance Company
<PAGE>
Table of Contents
Article Page
I Classes of Business Reinsured 1
II Term 2
III Territory 3
IV Exclusions 3
V Retention and Limit 4
VI Definitions 5
VII Claims and Loss Adjustment Expense 6
VIII Other Reinsurance 7
IX Premium 7
X Offset (BRMA 36C) 7
XI Salvage and Subrogation 8
XII Access to Records (BRMA 1D) 8
XIII Liability of the Reinsurer 8
XIV Net Retained Lines (BRMA 32E) 8
XV Errors and Omissions (BRMA 14F) 9
XVI Currency (BRMA 12A) 9
XVII Taxes (BRMA 50B) 9
XVIII Federal Excise Tax (BRMA 17A) 9
XIX Unearned Premium and Loss Reserves 9
XX Insolvency 11
XXI Arbitration 11
XXII Service of Suit (BRMA 49C) 12
XXIII Agency Agreement 13
XXIV Intermediary (BRMA 23A) 13
Aggregate Stop Loss
Reinsurance Contract
Effective: January 1, 1998
issued to
Amwest Surety Insurance Company
Far West Insurance Company
and
Condor Insurance Company
all of Omaha, Nebraska
(hereinafter referred to collectively as the "Company")
by
Underwriters Reinsurance Company (Barbados), Inc.
Barbados, West Indies
(hereinafter referred to as the "Reinsurer")
Article I - Business Reinsured
By this Contract the Reinsurer agrees to reinsure and/or indemnify the Company
for the net excess liability which may accrue to the Company during the term of
this Contract under its bonds, policies, contracts and binders of insurance or
reinsurance (hereinafter called "bonds," as respects surety business, and
"policies," as respects property and casualty business) whether in force or
expired on the effective date hereof, issued or renewed on or after that date
(including bonds or policies with premium anniversary dates on or after that
date), for all surety business and property and casualty business written by the
Company (direct and assumed), subject to the terms, conditions and limitations
hereinafter set forth.
Article II - Term
This Contract shall become effective on January 1, 1998, with respect to losses
occurring on or after that date and shall remain in force until December 31,
1998, both days inclusive.
Article III - Territory
The territorial limits of this Contract shall be identical with those of the
Company's bonds or policies.
Article IV - Retention and Limit
A. Coverage A: As respects surety business, no claim shall be made under this
Contract unless and until the Company shall have first incurred an amount
of ultimate net loss on business covered during the term of this Contract
in excess of 32.80% of its net earned premium for surety business during
the term of this Contract. The Reinsurer shall then be liable for an
amount equal to 7.0% of net earned premium for surety business during the
term of this Contract in excess of the Company's ultimate net loss in
excess of its retention for the term of this Contract.
B. Coverage B: As respects property and casualty business, no claim shall be
made under this Contract unless and until the Company shall have first
incurred an amount of ultimate net loss on business covered during the
term of this Contract in excess of 67.0% of its net earned premium for
property and casualty business during the term of this Contract. The
Reinsurer shall then be liable for an amount equal to 7.0% of net earned
premium for surety business during the term of this Contract in excess of
the Company's ultimate net loss in excess of its retention for the term of
this Contract.
C. As respects losses under Coverage A or Coverage B or any combination
thereof, the Reinsurer's liability as respects all losses occurring during
the term of this Contract shall not exceed an amount equal to 7.0% of the
net earned premium for surety business during the term of this Contract.
D. As respects Coverage A and/or Coverage B, the Company shall have the
option to purchase additional reinsurance limit equal to 7.0% of the net
earned premium for surety business during the term of this Contract. This
option expires on December 31, 1998 and can only be exercised if the
ultimate net loss ceded under this Contract is less than 3.5% of net
earned premium for the term of this Contract.
Article V - Definitions
A. "Net excess liability" as used herein shall mean those amounts payable by
the Company as defined in the ultimate net loss definition set forth in
paragraph B below.
B. "Ultimate net loss" as used herein is defined as the sum or sums
(including loss in excess of bond or policy limits, extra contractual
obligations, prejudgment interest if included as part of an award or
judgment and all loss adjustment expense as hereinafter defined) paid or
payable by the Company in settlement of claims and in satisfaction of
judgments rendered on account of such claims, after deduction of all
salvage, all recoveries and all claims on inuring insurance or
reinsurance, whether collectible or not. Nothing herein shall be construed
to mean that losses under this Contract are not recoverable until the
Company's ultimate net loss has been ascertained.
C. "Loss in excess of bond or policy limits" and "extra contractual
obligations" as used herein shall mean:
1. "Loss in excess of bond or policy limits" shall mean 90% of any
amount paid or payable by the Company under a bond or policy ceded
to this Contract in excess of its bond or policy limits, but
otherwise within the terms of its bond or policy, as a result of an
action against it by its insured or its insured's assignee to
recover damages the insured is legally obligated to pay to a third
party claimant because of the Company's alleged or actual negligence
or bad faith in rejecting a settlement within bond or policy limits,
or in discharging its duty to defend or prepare the defense in the
trial of an action against its insured, or in discharging its duty
to prepare or prosecute an appeal consequent upon such an action.
2. "Extra contractual obligations" shall mean 90% of any punitive,
exemplary, compensatory or consequential damages, other than loss in
excess of bond or policy limits, paid or payable by the Company
under a bond or policy ceded to this Contract as a result of an
action against it by its insured, its insured's assignee or a third
party claimant, which action alleges negligence or bad faith on the
part of the Company in handling a claim under a bond or policy
subject to this Contract.
Any loss in excess of bond or policy limits or extra contractual
obligation shall be deemed to have occurred on the same date as the loss
covered or alleged to be covered under the bond or policy.
Notwithstanding anything stated herein, this Contract shall not apply to
any loss incurred by the Company as a result of any fraudulent and/or
criminal act by any officer or director of the Company acting individually
or collectively or in collusion with an individual or corporation or any
other organization or party involved in the presentation, defense or
settlement of any claim covered hereunder
D. As respects surety business, "loss adjustment expense" as used herein
shall mean expenses allocable to the investigation, defense and/or
settlement of claims, including 1) prejudgment interest, unless included
as part of the award or judgment; 2) post-judgment interest; and 3) legal
expenses and costs incurred in connection with coverage questions and
legal actions connected thereto. It is agreed that for purposes of this
Contract, loss adjustment expense shall be no greater than 8.4% of net
earned premium for surety business during the term of this Contract.
With respect to legal expenses and costs incurred in direct connection
with declaratory judgment actions brought to resolve bond language
coverage disputes between the Company and its insured, such expenses
shall, for purposes of this Contract, not exceed an amount equal to the
applicable limit of the bond or bonds involved unless agreed to by the
Reinsurer.
E. As respects property and casualty business, "loss adjustment expense" as
used herein shall mean expenses allocable to the investigation, defense
and/or settlement of specific claims, including 1) prejudgment interest,
unless included as part of the award or judgment; 2) post-judgment
interest; and 3) legal expenses and costs incurred in connection with
coverage questions and legal actions connected thereto; but not including
office expenses or salaries of the Company's regular employees, except
that allocated outside costs of the Company shall be included.
With respect to legal expenses and costs incurred in direct connection
with declaratory judgment actions brought to resolve policy language
coverage disputes between the Company and its insured, such expenses
shall, for purposes of this Contract, not exceed an amount equal to the
applicable limit of the policy or policies involved unless agreed to by
the Reinsurer.
F. "Net earned premium" as used herein is defined as gross earned premium of
the Company for the classes of business reinsured hereunder, less the
earned portion of premiums ceded by the Company for reinsurance which
inures to the benefit of this Contract or increases the Company's
available capacity.
Article VI - Other Reinsurance
A. Notwithstanding the provisions of paragraph B of Article IV, the Company
is permitted, but not required, to purchase other facultative and/or other
treaty reinsurance on business subject to this Contract. Premiums ceded by
the Company for reinsurance which inures to the benefit of this Contract
or increases the Company' s available capacity shall be deducted in
determining subject premium hereunder as provided in Article IX.
B. It is agreed by the Company that inuring reinsurance agreements in force
at the inception of this Contract shall remain in force during the term of
this Contract, or so deemed.
Article VII - Loss Notices and Settlements
A. Whenever losses sustained by the Company appear likely to result in a
claim hereunder, the Company shall notify the Reinsurer, and the Reinsurer
shall have the right to participate in the adjustment of such losses at
its own expense.
B. All loss settlements made by the Company, provided they are within the
terms of this Contract, shall be binding upon the Reinsurer, and the
Reinsurer agrees to pay all amounts for which it may be liable upon
receipt of reasonable evidence of the amount paid (or scheduled to be
paid) by the Company.
Article VIII - Salvage and Subrogation
The Reinsurer shall be credited with salvage (i.e., reimbursement obtained or
recovery made by the Company, less the actual cost, excluding salaries of
officials and employees of the Company and sums paid to attorneys as retainer,
of obtaining such reimbursement or making such recovery) on account of claims
and settlements involving reinsurance hereunder. Salvage thereon shall always be
used to reimburse the excess carriers in the reverse order of their priority
according to their participation before being used in any way to reimburse the
Company for its primary loss. The Company hereby agrees to enforce its rights to
salvage or subrogation relating to any loss, a part of which loss was sustained
by the Reinsurer, and to prosecute all claims arising out of such rights.
Article IX - Reinsurance Premium
A. As premium for the reinsurance provided hereunder, the Company shall pay
the Reinsurer 2.0% of its net earned premium for the term of this Contract
B. The Company shall pay the Reinsurer an annual minimum and deposit premium
of $1,900,000 in equal semi-annual installments of $950,000 on January 1
and July 1 of 1998.
C. Within 60 days after the expiration of this Contract, the Company shall
provide a report to the Reinsurer setting forth the premium due hereunder,
computed in accordance with paragraph A and if the premium so computed is
greater that the previously paid minimum and deposit premium, the balance
shall be remitted by the Company with its report.
D. As respects the reinsurance limit available under paragraph B of Article
IV, the premium payable shall be adjusted at a rate of 1.33% of its net
earned premium for surety business, subject to a minimum and deposit
premium of $1,000,000 payable on January 1, 1999.
Article X - Late Payments
A. It is understood and agreed that the provisions of this Article shall not
be implemented unless specifically invoked, in writing, by one of the
parties to this Contract.
B. In the event any premium, loss or other payment due either party is not
received by the intermediary named in Article XXV (hereinafter referred to
as the "Intermediary") by the payment due date, the party to whom payment
is due may, by notifying the Intermediary in writing, require the debtor
party to pay, and the debtor party agrees to pay, an interest penalty on
the amount past due calculated for each such payment on the last business
day of each month as follows:
1. The number of full days which have expired since the due date or
the last monthly calculation, whichever the lesser; times
2. 1/365th of the six month (or nearest thereto) U.S. Treasury Bill
rate, as quoted in the Wall Street Journal on the first business day
of the month for which the calculation is being made; times
3. The amount past due, including accrued interest.
It is agreed that interest shall accumulate until payment of the original
amount due plus interest penalties have been received by the Intermediary.
C. The establishment of the due date shall, for purposes of this Article, be
determined as follows:
1. As respects the payment of routine deposits and premiums due the
Reinsurer, the due date shall be as provided for in the applicable
section of this Contract. In the event a due date is not
specifically stated for a given payment, it shall be deemed due 45
days after the date of transmittal by the Intermediary of the
initial billing for each such payment.
2. Any claim or loss payment due the Company hereunder shall be deemed
due five business days following receipt by the applicable
Subscribing Reinsurer of written notification that payment has been
received from Subscribing Reinsurers constituting at least 66 2/3%
of the interests and liabilities of all Subscribing Reinsurers
participating under the applicable layer of this Contract, who are
active as of the due date; it being understood that said date shall
not be later than 75 days from the date of transmittal by the
Intermediary of the initial billing for each such payment.
3. As respects any payment, adjustment or return due either party not
otherwise provided for in subparagraphs 1 and 2 of paragraph C
above, the due date shall be deemed as five business days following
receipt of written notification that the provisions of this Article
have been invoked.
For purposes of interest calculations only, amounts due hereunder shall be
deemed paid upon receipt by the Intermediary.
D. Nothing herein shall be construed as limiting or prohibiting 1) a
Subscribing Reinsurer from contesting the validity of any claim, or from
participating in the defense or control of any claim or suit; or 2)
either party from contesting the validity of any payment, or from
initiating any arbitration or other proceeding in accordance with the
provisions of this Contract. If the debtor party prevails in an arbitration
or other proceeding, then any interest penalties due hereunder on the
amount in dispute shall be null and void. If the debtor party loses in such
proceeding, then the interest penalty on the amount determined to be due
hereunder shall be calculated in accordance with the provisions set forth
above unless otherwise determined by such proceedings. If a debtor party
advances payment of any amount it is contesting, and proves to be correct
in its contestation, either in whole or in part, the other party shall
reimburse the debtor party for any such excess payment made plus interest
on the excess amount calculated in accordance with this Article.
E. As provided under Article VIII, it is understood and agreed that the
Company shall furnish the Reinsurer with usual and customary claim
information and nothing herein shall be construed as limiting or
prohibiting a Subscribing Reinsurer from requesting additional information
that it may deem necessary.
F. As respects subparagraph 2 of paragraph C above, a Subscribing Reinsurer
shall be deemed not to be active when it 1) ceases assuming new or renewal
reinsurance business through the Intermediary; 2) is declared insolvent,
or put in liquidation, conservatorship or rehabilitation by a competent
regulatory authority or court; 3) is declared insolvent, or is the subject
of an administrative order or enters provisional liquidation and/or
liquidation; or 4) has a reduction in its statutory surplus or
shareholders' funds of 50% or more from its statutory surplus or
shareholders' funds as of the effective date of this Contract.
G. Interest penalties arising out of the application of this Article that are
$100 or less from any party shall be waived unless there is a pattern of
late payments consisting of three or more items over the course of any
12-month period.
Article XI - Reports and Remittances
Within 60 days after the end of each calendar quarter following the expiration
of this Contract, the Company shall report to the Reinsurer its aggregate
ultimate net loss paid for the contract term as of the end of the quarter. If
the aggregate ultimate net loss paid exceeds an amount equal to the Company's
retention hereunder for the contract term based on an estimate of the Company's
net earned premium for the contract term, the Reinsurer shall pay its portion of
such estimated excess (net of any prior payments for the contract term).
However, any such payment by the Reinsurer shall be provisional, subject to
adjustment when the Company's actual ultimate net loss and net earned premium
for the contract term have been determined.
Article XII - Commutation
The Company may commute this Contract with agreement by the Reinsurer.
Article XIII - Offset (BRMA 36C)
The Company and the Reinsurer shall have the right to offset any balance or
amounts due from one party to the other under the terms of this Contract. The
party asserting the right of offset may exercise such right any time whether the
balances due are on account of premiums or losses or otherwise.
Article XIV - Access to Records (BRMA 1D)
The Reinsurer or its designated representatives shall have access at any
reasonable time to all records of the Company which pertain in any way to this
reinsurance.
Article XV - Net Retained Lines
A. This Contract applies only to that portion of any bond or policy which the
Company retains net for its own account, and in calculating the amount of
any loss hereunder and also in computing the amount or amounts in excess
of which this Contract attaches, only loss or losses in respect of that
portion of any bond or policy which the Company retains net for its own
account shall be included.
B. The amount of the Reinsurer's liability hereunder in respect of any loss
or losses shall not be increased by reason of the inability of the Company
to collect from any other reinsurer(s), whether specific or general, any
amounts which may have become due from such reinsurer(s), whether such
inability arises from the insolvency of such other reinsurer(s) or
otherwise.
Article XVI - Errors and Omissions (BRMA 14F)
Inadvertent delays, errors or omissions made in connection with this Contract or
any transaction hereunder shall not relieve either party from any liability
which would have attached had such delay, error or omission not occurred,
provided always that such error or omission is rectified as soon as possible
after discovery.
Article XVII - Currency (BRMA 12A)
A. Whenever the word "Dollars" or the "$" sign appears in this Contract, they
shall be construed to mean United States Dollars and all transactions
under this Contract shall be in United States Dollars.
B. Amounts paid or received by the Company in any other currency shall be
converted to United States Dollars at the rate of exchange at the date
such transaction is entered into the books of the Company.
Article XVIII - Taxes (BRMA 50B)
In consideration of the terms under which this Contract is issued, the Company
will not claim a deduction in respect of the premium hereon when making tax
returns, other than income or profits tax returns, to any state or territory of
the United States of America or the District of Columbia.
Article XIX - Federal Excise Tax (BRMA 17A)
(Applicable to those reinsurers, excepting Underwriters at Lloyd's London and
other reinsurers exempt from Federal Excise Tax, who are domiciled outside the
United States of America.)
A. The Reinsurer has agreed to allow for the purpose of paying the Federal
Excise Tax the applicable percentage of the premium payable hereon (as
imposed under Section 4371 of the Internal Revenue Code) to the extent
such premium is subject to the Federal Excise Tax.
B. In the event of any return premium becoming due hereunder the Reinsurer
will deduct the applicable percentage from the return premium payable
hereon and the Company or its agent should take steps to recover the tax
from the United States Government.
Article XX - Unauthorized Reinsurers
A. If the Reinsurer is unauthorized in any state of the United States of
America or the District of Columbia, the Reinsurer agrees to fund its
share of the Company's ceded unearned premium and outstanding loss and
loss adjustment expense reserves (including incurred but not reported loss
reserves) by:
1. Clean, irrevocable and unconditional letters of credit issued and
confirmed, if confirmation is required by the insurance regulatory
authorities involved, by a bank or banks meeting the NAIC Securities
Valuation Office credit standards for issuers of letters of credit
and acceptable to said insurance regulatory authorities; and/or
2. Escrow accounts for the benefit of the Company; and/or
3. Cash advances;
if, without such funding, a penalty would accrue to the Company on any
financial statement it is required to file with the insurance regulatory
authorities involved. The Reinsurer, at its sole option, may fund in other
than cash if its method and form of funding are acceptable to the
insurance regulatory authorities involved.
B. With regard to funding in whole or in part by letters of credit, it is
agreed that each letter of credit will be in a form acceptable to
insurance regulatory authorities involved, will be issued for a term of at
least one year and will include an "evergreen clause," which automatically
extends the term for at least one additional year at each expiration date
unless written notice of non-renewal is given to the Company not less than
30 days prior to said expiration date. The Company and the Reinsurer
further agree, notwithstanding anything to the contrary in this Contract,
that said letters of credit may be drawn upon by the Company or its
successors in interest at any time, without diminution because of the
insolvency of the Company or the Reinsurer, but only for one or more of
the following purposes:
1. To reimburse itself for the Reinsurer's share of unearned premiums
returned to insureds on account of bond or policy cancellations,
unless paid in cash by the Reinsurer;
2. To reimburse itself for the Reinsurer's share of losses and/or loss
adjustment expense paid under the terms of bonds or policies
reinsured hereunder, unless paid in cash by the Reinsurer;
3. To reimburse itself for the Reinsurer's share of any other amounts
claimed to be due hereunder, unless paid in cash by the Reinsurer;
4. To fund a cash account in an amount equal to the Reinsurer's share
of any ceded unearned premium and/or outstanding loss and loss
adjustment expense reserves (including incurred but not reported
loss reserves) funded by means of a letter of credit which is under
non-renewal notice, if said letter of credit has not been renewed or
replaced by the Reinsurer 10 days prior to its expiration date;
5. To refund to the Reinsurer any sum in excess of the actual amount
required to fund the Reinsurer's share of the Company's ceded
unearned premium and/or outstanding loss and loss adjustment expense
reserves (including incurred but not reported loss reserves), if so
requested by the Reinsurer.
In the event the amount drawn by the Company on any letter of credit is in
excess of the actual amount required for B(1), B(2) or B(4), or in the
case of B(3), the actual amount determined to be due, the Company shall
promptly return to the Reinsurer the excess amount so drawn.
Article XXI - Insolvency
A. In the event of the insolvency of one or more of the reinsured companies,
this reinsurance shall be payable directly to the company or to its
liquidator, receiver, conservator or statutory successor immediately upon
demand, with reasonable provision for verification, on the basis of the
liability of the company without diminution because of the insolvency of
the company or because the liquidator, receiver, conservator or statutory
successor of the company has failed to pay all or a portion of any claim.
It is agreed, however, that the liquidator, receiver, conservator or
statutory successor of the company shall give written notice to the
Reinsurer of the pendency of a claim against the company indicating the
policy or bond reinsured which claim would involve a possible liability on
the part of the Reinsurer within a reasonable time after such claim is
filed in the conservation or liquidation proceeding or in the receivership,
and that during the pendency of such claim, the Reinsurer may investigate
such claim and interpose, at its own expense, in the proceeding where such
claim is to be adjudicated, any defense or defenses that it may deem
available to the company or its liquidator, receiver, conservator or
statutory successor. The expense thus incurred by the Reinsurer shall be
chargeable, subject to the approval of the Court, against the company as
part of the expense of conservation or liquidation to the extent of a pro
rata share of the benefit which may accrue to the company solely as a
result of the defense undertaken by the Reinsurer.
B. Where two or more reinsurers are involved in the same claim and a majority
in interest elect to interpose defense to such claim, the expense shall be
apportioned in accordance with the terms of this Contract as though such
expense had been incurred by the company.
C. It is further understood and agreed that, in the event of the insolvency of
one or more of the reinsured companies, the reinsurance under this Contract
shall be payable directly by the Reinsurer to the company or to its
liquidator, receiver or statutory successor, except as provided by Section
4118(a) of the New York Insurance Law or except (1) where this Contract
specifically provides another payee of such reinsurance in the event of the
insolvency of the company or (2) where the Reinsurer with the consent of
the direct insured or insureds has assumed such bond or policy obligations
of the company as direct obligations of the Reinsurer to the payees under
such bonds or policies and in substitution for the obligations of the
company to such payees.
Article XXII - Arbitration
A. As a condition precedent to any right of action hereunder, any dispute
arising out of the interpretation, performance or breach of this Contract,
including the formation or validity thereof, shall be submitted for
decision to a panel of three arbitrators. Notice requesting arbitration
will be in writing and sent certified or registered mail, return receipt
requested.
B. One arbitrator shall be chosen by each party and the two arbitrators
shall, before instituting the hearing, choose an impartial third
arbitrator who shall preside at the hearing. If either party fails to
appoint its arbitrator within 30 days after being requested to do so by
the other party, the latter, after 10 days notice by certified or
registered mail of its intention to do so, may appoint the second
arbitrator.
C. If the two arbitrators are unable to agree upon the third arbitrator
within 30 days of their appointment, the two arbitrators will jointly
petition the American Arbitration Association to appoint the third
arbitrator from the AAA's Panel of Reinsurance Arbitrators.
D. All arbitrators shall be disinterested active or former executive officers
of insurance or reinsurance companies, underwriters at Lloyd's of London,
reinsurance intermediaries and attorneys actively or formerly engaged in
practicing law in the areas of insurance or reinsurance.
E. Within 30 days after notice of appointment of all arbitrators, the panel
shall meet and determine timely periods for briefs, discovery procedures
and schedules for hearings.
F. The panel shall be relieved of all judicial formality and shall not be
bound by the strict rules of procedure and evidence. The arbitration shall
take place in Woodland Hills, California or, if unanimously agreed by the
panel, any other mutually acceptable location.
G. If more than one reinsurer is involved in the same dispute, all such
reinsurers shall constitute and act as one party for purposes of this
article. However, nothing shall impair the rights of such reinsurers to
assert several rather than joint defenses or claims, nor shall this
provision be construed as changing the liability of the reinsurers under
the terms of this Contract from several to joint.
H. The panel shall make its decision considering custom and practice as
promptly as possible following the termination of hearings. The decision
of any two arbitrators, when rendered in writing shall be final and
binding, and judgment upon the award may be entered in any court having
jurisdiction. The panel is empowered to grant such interim relief as it
may deem appropriate.
I. Each party shall bear the expense of its own arbitrator and shall jointly
and equally with the other party bear the cost of the third arbitrator.
The remaining costs of the arbitration shall be allocated by the panel.
The panel may, at its discretion, award such further costs and expenses as
it considers appropriate, including but not limited to attorney's fees and
interest to the extent permitted by law. Insofar as the arbitration panel
chooses to look to substantive law, it shall consider the law of the State
of California.
Article XXIII - Service of Suit (BRMA 49C)
(Applicable if the Reinsurer is not domiciled in the United States of America,
and/or is not authorized in any State, Territory or District of the United
States where authorization is required by insurance regulatory authorities)
A. It is agreed that in the event the Reinsurer fails to pay any amount
claimed to be due hereunder, the Reinsurer, at the request of the Company,
will submit to the jurisdiction of a court of competent jurisdiction
within the United States. Nothing in this Article constitutes or should be
understood to constitute a waiver of the Reinsurer's rights to commence an
action in any court of competent jurisdiction in the United States, to
remove an action to a United States District Court, or to seek a transfer
of a case to another court as permitted by the laws of the United States
or of any state in the United States.
B. Further, pursuant to any statute of any state, territory or district of
the United States which makes provision therefor, the Reinsurer hereby
designates the party named in its Interests and Liabilities Agreement, or
if no party is named therein, the Superintendent, Commissioner or Director
of Insurance or other officer specified for that purpose in the statute,
or his successor or successors in office, as its true and lawful attorney
upon whom may be served any lawful process in any action, suit or
proceeding instituted by or on behalf of the Company or any beneficiary
hereunder arising out of this Contract.
Article XXIV - Agency Agreement
Amwest Surety Insurance Company shall be deemed the agent of the other reinsured
company for purposes of sending or receiving notices required by the terms and
conditions of this Contract, and for purposes of remitting or receiving any
monies due any party.
Article XXV - Intermediary (BRMA 23A)
E. W. Blanch Co. is hereby recognized as the Intermediary negotiating this
Contract for all business hereunder. All communications (including but not
limited to notices, statements, premium, return premium, commissions, taxes,
losses, loss adjustment expense, salvages and loss settlements) relating thereto
shall be transmitted to the Company or the Reinsurer through E. W. Blanch Co.,
Reinsurance Services, 3500 West 80th Street, Minneapolis, Minnesota 55431.
Payments by the Company to the Intermediary shall be deemed to constitute
payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be
deemed to constitute payment to the Company only to the extent that such
payments are actually received by the Company.
In Witness Whereof, the parties hereto by their duly authorized representatives
have executed this Contract as of the dates undermentioned at:
Calabasas, California, this _______ day of _______________________ 199___.
--------------------------------------------------
Amwest Surety Insurance Company
Far West Insurance Company
Condor Insurance Company
Barbados, West Indies, this _______ day of _______________________ 199___.
--------------------------------------------------
Underwriters Reinsurance Company (Barbados), Inc.
<PAGE>
E. W. BLANCH CO.
Table of Contents
Article Page
I Business Reinsured 1
II Term 1
III Territory 1
IV Retention and Limit 2
V Definitions 2
VI Other Reinsurance 4
VII Loss Notices and Settlements 4
VIII Salvage and Subrogation 5
IX Reinsurance Premium 5
X Late Payments 5
XI Reports and Remittances 7
XII Commutation 7
XIII Offset (BRMA 36C) 7
XIV Access to Records (BRMA 1D) 8
XV Net Retained Lines 8
XVI Errors and Omissions (BRMA 14F) 8
XVII Currency (BRMA 12A) 8
XVIII Taxes (BRMA 50B) 8
XIX Federal Excise Tax (BRMA 17A) 9
XX Unauthorized Reinsurers 9
XXI Insolvency 10
XXII Arbitration 11
XXIII Service of Suit (BRMA 49C) 12
XXIV Agency Agreement 13
XXV Intermediary (BRMA 23A) 13
75% Florida Multiple Line
Quota Share Reinsurance Contract
Effective: July 1, 1998
issued to
Condor Insurance Company
Amwest Surety Insurance Company
and
Far West Insurance Company
All of Omaha, Nebraska
(hereinafter referred to collectively as the "Company")
by
The Subscribing Reinsurer(s) Executing the
Interests and Liabilities Agreement(s)
Attached Hereto
(hereinafter referred to as the "Reinsurer")
Article I - Classes of Business Reinsured
A. By this Contract the Company obligates itself to cede to the Reinsurer and
the Reinsurer obligates itself to accept quota share reinsurance of the
Company's net liability under policies, contracts and binders of insurance
or reinsurance (hereinafter called "policies") in force at the effective
date hereof, or issued or renewed on or after that date, and classified by
the Company as Homeowners Multiple Peril (Sections I and II), Mobile
homeowners Multiple Peril (Sections I and II) and Inland Marine business.
B. "Net liability" as used herein is defined as the Company's gross liability
remaining after cessions, if any, to other reinsurers.
C. The liability of the Reinsurer with respect to each cession hereunder
shall commence obligatorily and simultaneously with that of the Company,
subject to the terms, conditions and limitations hereinafter set forth.
Article II - Term
A. This Contract shall become effective at 12:01 a.m., Local Standard Time at
the location of the risk, July 1, 1998, with respect to losses arising out
of occurrences commencing on or after that time and date, and shall remain
in force until 12:01 a.m., Local Standard Time at the location of the
risk, July 1, 1999 (i.e., providing coverage on a "risks attaching/
underwriting year" basis during the term of this Contract).
B. Unless the Company elects to reassume the ceded unearned premium in force
on the effective date of expiration, and so notifies the Reinsurer prior
to or as promptly as possible after the effective date of expiration,
reinsurance hereunder on business in force on the effective date of
expiration shall remain in full force and effect until expiration,
cancellation or next premium anniversary of such business, whichever first
occurs, but in no event beyond 12 months plus odd time (not exceeding 15
months in all) following the effective date of expiration.
C. Notwithstanding the provisions of paragraph B above, in the event the
Company is prohibited or precluded by the appropriate regulatory
authorities, or by law, from arranging mid-term cancellation or
non-renewal of any policies subject to this Contract beyond their natural
expiry, the Reinsurer agrees to extend coverage hereunder with respect to
such policies until such policies may be terminated by the Company, but in
no event beyond 24 months after the effective date of expiration.
D. All premiums and losses from policies allocated to this Contract shall be
credited or charged, respectively, to this Contract, regardless of the
date said premiums earn or such losses occur. It is understood that a
policy will be allocated to this Contract if the term of this Contract is
in effect as of:
1. As respects all new policies, the effective date of such policies;
2. As respects renewals of one year or less term policies, the renewal
date of such policies;
3. As respects continuous or greater than one year term policies, the
premium anniversary date of such policies.
Notwithstanding the foregoing, it is understood that policies in force on
July 1, 1998, shall be allocated to this Contract. Policies shall remain
allocated to this Contract until the next renewal date or premium
anniversary date.
Article III - Territory
This Contract shall only apply to policies issued to insureds domiciled in the
State of Florida, but this limitation shall not apply to losses if the Company's
policies provide coverage outside the aforesaid territorial limits.
Article IV - Exclusions
This Contract does not apply to and specifically excludes the following:
1. All business not included in Article I.
2. All excess of loss reinsurance assumed by the Company.
3. Reinsurance assumed by the Company under obligatory reinsurance
agreements, except agency reinsurance where the policies involved
are to be reunderwritten in accordance with the underwriting
standards of the Company and reissued as Company policies at the
next anniversary or expiration date.
4. Financial guarantee and insolvency.
5. Flood and/or earthquake when written on a stand-alone basis.
6. Mortgage Impairment insurances and similar kinds of insurances,
however styled.
7. Workers' Compensation except as respects domestic employees.
8. Nuclear risks as defined in the "Nuclear Incident Exclusion Clause -
Physical Damage - Reinsurance" and the "Nuclear Incident Exclusion
Clause - Liability - Reinsurance" attached to and forming part of
this Contract.
9. Loss or damage caused by or resulting from war, invasion,
hostilities, acts of foreign enemies, civil war, rebellion,
insurrection, military or usurped power, or martial law or
confiscation by order of any government or public authority, but
this exclusion shall not apply to loss or damage covered under a
standard policy with a standard War Exclusion Clause.
10. This Contract excludes loss and/or damage and/or costs and/or
expenses arising from asbestos presence and/or seepage and/or
pollution and/or contamination, other than contamination from smoke.
Nevertheless, this exclusion does not preclude payment of the cost
of removing debris of property damaged by a loss otherwise covered
hereunder, subject always to a limit of not more than $10,000 plus
25% of the Company's property loss under the applicable original
policy. However, this exclusion will not apply where there has been
a final court ruling that the Company's asbestos and/or seepage
and/or pollution and/or contamination exclusion is invalid or
unenforceable.
11. Liability as a member, subscriber or reinsurer of any Pool, Syndicate or
Association; and any combination of insurers or reinsurers formed for the
purpose of covering specific perils, specific classes of business or for
the purpose of insuring risks located in specific geographical areas.
However, this exclusion shall not apply to residual market mechanisms,
including but not limited to FAIR Plans, Joint Underwriting Associations,
or to Coastal Pools, Beach Plans or similar plans, however styled. It is
understood and agreed, however, that this reinsurance does not include any
increase in liability to the Company resulting from (a) the inability of
any other participant in a residual market mechanism, including but not
limited to a FAIR Plan, Joint Underwriting Association, Coastal Pool, Beach
Plan or similar plan, to meet its liability, or (b) any claim against such
a residual market mechanism, including but not limited to a FAIR Plan,
Joint Underwriting Association, Coastal Pool, Beach Plan or similar plan,
or any participant therein, including the Company, whether by way of
subrogation or otherwise, brought by or on behalf of any insolvency fund.
Article V - Retention and Limit
A. As respects business subject to this Contract, the Company shall retain
and be liable for 25.0% of its net liability. The Company shall cede to
the Reinsurer and the Reinsurer agrees to accept 75.0% of the Company's
net liability.
B. The Company shall purchase or be deemed to have purchased inuring
reinsurance to limit its loss to the following amounts:
1. Homeowners Multiple Peril (Section I, Coverage A), $500,000 each risk;
2. Homeowners Multiple Peril (Section II), $500,000 each risk.
C. The Company shall be the sole judge of what constitutes "one risk".
D. As respects the interim period, the Reinsurer's provisional limit of
liability for property losses arising out of any one loss occurrence shall
be $5,000,000 (exclusive of loss in excess of policy limits, extra
contractual obligations, loss adjustment expense or any assessments from
any FAIR plans, Joint Underwriting Associations, Coastal Pools, Beach Plans
or similar plans or any insolvency fund or guaranty fund). After expiration
of the interim period, the Reinsurer's provisional limit of liability for
property losses arising out of any one loss occurrence shall be 200% of the
actual gross ceded property premium hereunder (exclusive of loss in excess
of policy limits, extra contractual obligations, loss adjustment expense or
any assessments from any FAIR plans, Joint Underwriting Associations,
Coastal Pools, Beach Plans or similar plans or any insolvency fund or
guaranty fund).
However, it is understood that the Reinsurer's final limit of liability
for losses (including those losses occurring during the interim period),
not including any loss adjustment expense, incurred from any one loss
occurrence shall ultimately be calculated in accordance with paragraph A
above, subject to the maximum limits of liability specified in paragraph
F.
E. "Interim period" as used herein shall mean the period from the effective
date of this Contract through the date that the Company's gross ceded
property premium hereunder exceeds $2,500,000.
F. Notwithstanding the provisions of paragraph D above, in no event shall the
Reinsurer's liability for property losses arising out of any one loss
occurrence exceed 200% of the gross ceded property premium hereunder,
after deduction for inuring reinsurance, subject to a maximum of
$25,000,000 (exclusive of loss in excess of policy limits, extra
contractual obligations, loss adjustment expense or any assessments from
any FAIR plans, Joint Underwriting Associations, Coastal Pools, Beach
Plans or similar plans or any insolvency fund or guaranty fund).
G. Notwithstanding the provisions of paragraph A above, in no event shall the
Reinsurer's liability for losses from any assessments from any FAIR plans,
Joint Underwriting Associations or to Coastal Pools, Beach Plans or
similar plans or any insolvency fund or guaranty fund exceed $25,000,000
during the term of this Contract.
H. In the event the Company suffers losses arising out of the same loss
occurrence involving two or more separate policies allocated to this
Contract and to any prior or replacement contract, if any, the loss
occurrence limitation specified in paragraphs D and E above shall be
reduced to the percentage that the loss under policies allocated to this
Contract bears to the Company's total losses arising out of that loss
occurrence.
Article VI - Assessments
A. The provisions of Article V shall apply to a proportion of any assessments
made against the Company pursuant to those laws and regulations creating
obligatory funds (including insurance guaranty and insolvency funds to the
extent that such costs are transferable to the policyholder), pools, joint
underwriting associations, FAIR plans and similar plans, said proportion
to be the proportion of the Company's total premiums causing the
assessment which were or are subject to this Contract.
B. Upon expiration of this Contract, the provisions of this Article shall
continue to apply for as long as the Company is required to accept
assignments and/or assessments because of the business reinsured
hereunder.
Article VII - Loss in Excess of Policy Limits/ECO
A. In the event the Company pays or is held liable to pay an amount of loss in
excess of its policy limit, but otherwise within the terms of its policy
(hereinafter called "loss in excess of policy limits") or any punitive,
exemplary, compensatory or consequential damages, other than loss in excess
of policy limits (hereinafter called "extra contractual obligations")
because of alleged or actual bad faith or negligence on its part in
rejecting a settlement within policy limits, or in discharging its duty to
defend or prepare the defense in the trial of an action against its
policyholder, or in discharging its duty to prepare or prosecute an appeal
consequent upon such an action, or in otherwise handling a claim under a
policy subject to this Contract, the loss in excess of policy limits and/or
the extra contractual obligations shall be added to the Company's loss
(including loss adjustment expense), if any, under the policy involved, and
the sum thereof shall be subject to the provisions of Article V.
B. An extra contractual obligation shall be deemed to have occurred on the
same date as the loss covered or alleged to be covered under the policy.
C. Notwithstanding anything stated herein, this Contract shall not apply to
any loss in excess of policy limits or any extra contractual obligation
incurred by the Company as a result of any fraudulent and/or criminal act
by any officer or director of the Company acting individually or
collectively or in collusion with any individual or corporation or any
other organization or party involved in the presentation, defense or
settlement of any claim covered hereunder.
D. Recoveries from any form of insurance or reinsurance which protects the
Company against claims the subject matter of this Article shall inure to
the benefit of this Contract.
Article VIII - Claims and Loss Adjustment Expense
A. Losses shall be reported by the Company in summary form as hereinafter
provided, but the Company shall notify the Reinsurer immediately when a
specific case involves unusual circumstances or large loss possibilities.
The Reinsurer shall have the right to participate, at its own expense, in
the defense or control of any claim or suit or proceeding involving this
reinsurance.
B. All loss settlements made by the Company, whether under strict policy
conditions or by way of compromise, shall be binding upon the Reinsurer,
and the Reinsurer agrees to pay or allow, as the case may be, its
proportion of each such settlement in accordance with Article XIII.
C. In the event of a claim under a policy subject hereto, the Reinsurer shall
be liable for its proportionate share of loss adjustment expense incurred
by the Company in connection therewith, and shall be credited with its
proportionate share of any recoveries of such expense. Loss adjustment
expense shall include litigation expenses, both prejudgment and
postjudgment interest, and legal expenses incurred in direct connection
with legal actions, including but not limited to declaratory judgment
actions, regardless of how such expenses are classified for statutory
reporting purposes. "Declaratory judgment actions" are defined as those
actions brought to determine the Company's defense and/or indemnification
obligations that are allocable only to specific policies and claims covered
under this Contract. Any declaratory judgment expense shall be deemed to
have been fully incurred on the same date as the original loss (if any)
giving rise to the action. Loss adjustment expense shall not include office
expenses or salaries of the Company's regular employees.
Article IX - Salvage and Subrogation
The Reinsurer shall be credited with its proportionate share of salvage (i.e.,
reimbursement obtained or recovery made by the Company, less the actual cost,
excluding salaries of officials and employees of the Company, and sums paid to
attorneys as retainer, of obtaining such reimbursement or making such recovery)
on account of claims and settlements involving reinsurance hereunder. The
Company hereby agrees to enforce its rights to salvage or subrogation relating
to any loss, a part of which loss was sustained by the Reinsurer, and to
prosecute all claims arising out of such rights.
Article X - Florida Hurricane Catastrophe Fund
A. Any loss reimbursement the Company receives under the Florida Hurricane
Catastrophe Fund (FHCF) as a result of loss occurrences commencing during
the term of this Contract shall be deemed to be salvage received by the
Company in determining ultimate net loss under this Contract. If the
salvage amount is based on the Company's losses in more than one loss
occurrence and the FHCF does not designate the amount allocable to each
loss occurrence, the salvage amount shall be prorated in the proportion
that the Company's losses in each loss occurrence bear to the Company's
total losses arising out of all loss occurrences to which the salvage
applies. If, as a result of such salvage, the loss to the Reinsurer under
this Contract in any one loss occurrence is less than the amount previously
paid by the Reinsurer, the Company shall promptly remit the difference to
the Reinsurer.
B. Any return premium due the Company under this Contract as a result of a
salvage payment made to the Reinsurer in accordance with paragraph A shall
be payable by the Reinsurer concurrently with payment by the Company of
the salvage amount.
C. Any reimbursement premiums, equalization charge or emergency assessment
paid by the Company under the FHCF shall be deemed to be premiums paid for
inuring reinsurance.
Article XI - Original Conditions
A. All reinsurance under this Contract shall be subject to the same rates,
terms, conditions, waivers and interpretations and to the same
modifications and alterations as the respective policies of the Company.
However, in no event shall this be construed in any way to provide
coverage outside the terms and conditions set forth in this Contract. The
Reinsurer shall be credited with its exact proportion of the original
premiums received by the Company (net of rebates, policy fees or
equivalent charges, other service fees or brokerage fees), prior to
disbursement of any dividends, but after deduction of premiums, if any,
ceded by the Company for inuring reinsurance.
B. Nothing herein shall in any manner create any obligations or establish any
rights against the Reinsurer in favor of any third party or any persons
not parties to this Contract.
Article XII - Sliding Scale Commission
A. The Reinsurer shall allow the Company a 32.0% provisional commission on
all premiums ceded to the Reinsurer hereunder. The Company shall allow the
Reinsurer return commission on return premiums at the same rate. The
provisional commission allowed the Company shall be adjusted periodically
in accordance with the provisions set forth herein.
B. The adjusted commission rate shall be calculated as follows and be applied
to premiums earned for the term of this Contract:
1. If the ratio of losses incurred to premiums earned is 59.0% or
greater, the adjusted commission rate for the term of this Contract
shall be 26.0%
2. If the ratio of losses incurred to premiums earned is less than
59.0%, but not less than 50.0%, the adjusted commission rate for the
term of this Contract shall be 26.0%, plus 67.0% of the difference
in percentage points between 59.0% and the actual ratio of losses
incurred to premiums earned;
3. If the ratio of losses incurred to premiums earned is less than
50.0%, but not less than 40.0%, the adjusted commission rate for the
term of this Contract shall be 32.0% plus 60.0% of the difference in
percentage points between 50.0% and the actual ratio of losses
incurred to premiums earned;
4. If the ratio of losses incurred to premiums earned is 40.0% or less,
the adjusted commission rate for the term of this Contract shall be
38.0%.
C. Within 30 days after 12 months following the expiration of this Contract,
the Company shall calculate and report the adjusted commission on premiums
earned for the term of this Contract. If the adjusted commission on
premiums earned is less than commissions previously allowed by the
Reinsurer on premiums earned for the term of this Contract, the Company
shall remit the difference to the Reinsurer with its report. If the
adjusted commission on premiums earned is greater than commissions
previously allowed by the Reinsurer on premiums earned for the term of
this Contract, the Reinsurer shall remit the difference to the Company as
promptly as possible after receipt and verification of the Company's
report.
D. In the event the adjusted commission calculation for the term of this
Contract is based partly on ceded reserves for losses and/or loss
adjustment expense, the adjusted commission shall be recalculated within
30 days after the end of each subsequent 12-month period until all losses
under policies with effective or renewal dates during the term of this
Contract have been settled. Any balance shown to be due either party as a
result of any such recalculation shall be remitted promptly by the other
party.
E. "Losses incurred" as used herein shall mean ceded losses and loss
adjustment expense paid as of the effective date of calculation, plus the
ceded reserves for losses and loss adjustment expense outstanding as of
the same date, it being understood and agreed that all losses and related
loss adjustment expense under policies with effective or renewal dates
during the term of this Contract shall be charged to this Contract,
regardless of the date said losses actually occur, unless this Contract
expires on a "cutoff" basis, in which event the Reinsurer shall have no
liability for losses occurring after the effective date of expiration.
F. "Premiums earned" as used herein shall mean ceded net written premiums for
policies with effective or renewal dates during the term of this Contract,
less the unearned portion thereof as of the effective date of calculation,
it being understood and agreed that all premiums for policies with
effective or renewal dates during the term of this Contract shall be
credited to this Contract, unless this Contract expires on a "cutoff"
basis, in which event the unearned reinsurance premium (less previously
allowed ceding commission) as of the effective date of expiration shall be
returned by the Reinsurer to the Company.
G. It is expressly agreed that the ceding commission allowed the Company
includes provision for all dividends, commissions, taxes, assessments, and
all other expenses of whatever nature, except loss adjustment expense.
Article XIII - Reports and Remittances
A. As promptly as possible after the effective date of this Contract, the
Company shall remit the Reinsurer's share of the unearned premium (less
provisional commission thereon) applicable to subject business in force at
the effective date of this Contract.
B. Within 30 days after the end of each month, the Company shall report to
the Reinsurer:
1. Ceded net written premium for the month;
2. Ceded net collected premium for the month;
3. Provisional commission on (2) above;
4. Ceded losses and loss adjustment expense paid during the month;
5. Ceded unearned premiums and ceded outstanding loss reserves as of the
end of the month.
Within 45 days after the end of each month, the positive balance of (2)
less (3) less (4) shall be remitted by the Company. Any balance shown to
be due the Company shall be remitted by the Reinsurer within 45 days after
the end of the month of account.
B. Annually, the Company shall furnish the Reinsurer with such information as
the Reinsurer may require to complete its Annual Convention Statement.
Article XIV - Loss Occurrence (NMA 2244/BRMA 27A)
A. The term "loss occurrence" shall mean the sum of all individual losses
directly occasioned by any one disaster, accident or loss or series of
disasters, accidents or losses arising out of one event which occurs
within the area of one state of the United States or province of Canada
and states or provinces contiguous thereto and to one another. However,
the duration and extent of any one "loss occurrence" shall be limited to
all individual losses sustained by the Company occurring during any period
of 168 consecutive hours arising out of and directly occasioned by the
same event, except that the term "loss occurrence" shall be further
defined as follows:
1. As regards windstorm, hail, tornado, hurricane, cyclone, including
ensuing collapse and water damage, all individual losses sustained
by the Company occurring during any period of 72 consecutive hours
arising out of and directly occasioned by the same event. However,
the event need not be limited to one state or province or states or
provinces contiguous thereto.
2. As regards riot, riot attending a strike, civil commotion, vandalism
and malicious mischief, all individual losses sustained by the
Company occurring during any period of 72 consecutive hours within
the area of one municipality or county and the municipalities or
counties contiguous thereto arising out of and directly occasioned
by the same event. The maximum duration of 72 consecutive hours may
be extended in respect of individual losses which occur beyond such
72 consecutive hours during the continued occupation of an assured's
premises by strikers, provided such occupation commenced during the
aforesaid period.
3. As regards earthquake (the epicentre of which need not necessarily
be within the territorial confines referred to in paragraph A of
this Article) and fire following directly occasioned by the
earthquake, only those individual fire losses which commence during
the period of 168 consecutive hours may be included in the Company's
"loss occurrence."
4. As regards "freeze," only individual losses directly occasioned by
collapse, breakage of glass and water damage (caused by bursting
frozen pipes and tanks) may be included in the Company's "loss
occurrence."
B. Except for those "loss occurrences" referred to in subparagraphs 2 of
paragraph A above, the Company may choose the date and time when any such
period of consecutive hours commences, provided that it is not earlier
than the date and time of the occurrence of the first recorded individual
loss sustained by the Company arising out of that disaster, accident or
loss, and provided that only one such period of 168 consecutive hours
shall apply with respect to one event, except for any "loss occurrences"
referred to in subparagraph 1 of paragraph A above where only one such
period of 72 consecutive hours shall apply with respect to one event,
regardless of the duration of the event.
C. However, as respects those "loss occurrences" referred to in subparagraph
2 of paragraph A above, if the disaster, accident or loss occasioned by
the event is of greater duration than 72 consecutive hours, then the
Company may divide that disaster, accident or loss into two or more "loss
occurrences," provided that no two periods overlap and no individual loss
is included in more than one such period, and provided that no period
commences earlier than the date and time of the occurrence of the first
recorded individual loss sustained by the Company arising out of that
disaster, accident or loss.
D. No individual losses occasioned by an event that would be covered by 72
hours clauses may be included in any "loss occurrence" claimed under the
168 hours provision.
Article XV - Late Payments
A. The provisions of this Article shall not be implemented unless
specifically invoked, in writing, by one of the parties to this Contract.
B. In the event any premium, loss or other payment due either party is not
received by the intermediary named in Article XXV (hereinafter referred to
as the "Intermediary") by the payment due date, the party to whom payment
is due, may, by notifying the Intermediary in writing, require the debtor
party to pay, and the debtor party agrees to pay, an interest penalty on
the amount past due calculated for each such payment on the last business
day of each month as follows:
1. The number of full days which have expired since the due date or the
last monthly calculation, whichever the lesser, times
2. 1/365ths of the 6-month United States Treasury Bill rate as quoted
in The Wall Street Journal on the first business day of the month
for which the calculation is made; times
3. The amount past due, including accrued interest.
It is agreed that interest shall accumulate until payment of the original
amount due plus interest penalties have been received by the Intermediary.
C. The establishment of the due date shall, for purposes of this Article, be
determined as follows:
1. As respects the payment of routine deposits and premiums due the
Reinsurer, the due date shall be as provided for in the applicable
section of this Contract. In the event a due date is not
specifically stated for a given payment, it shall be deemed due 30
days after the date of transmittal by the Intermediary of the
initial billing for each such payment.
2. Any claim or loss payment due the Company hereunder shall be deemed
due 5 business days after the proof of loss or demand for payment is
transmitted to the Reinsurer. If such loss or claim payment is not
received within the 5 days, interest will accrue on the payment or
amount overdue in accordance with paragraph B above, from the date
the proof of loss or demand for payment was transmitted to the
Reinsurer.
3. As respects any payment, adjustment or return due either party not
otherwise provided for in subparagraphs 1 and 2 of paragraph C
above, the due date shall be as provided for in the applicable
section of this Contract. In the event a due date is not
specifically stated for a given payment, it shall be deemed due 10
business days following transmittal of written notification that the
provisions of this Article have been invoked.
For purposes of interest calculations only, amounts due hereunder shall be
deemed paid upon receipt by the Intermediary.
D. Nothing herein shall be construed as limiting or prohibiting a Subscribing
Reinsurer from contesting the validity of any claim, or from participating
in the defense or control of any claim or suit, or prohibiting either party
from contesting the validity of any payment or from initiating any
arbitration or other proceeding in accordance with the provisions of this
Contract. If the debtor party prevails in an arbitration or other
proceeding, then any interest penalties due hereunder on the amount in
dispute shall be null and void. If the debtor party loses in such
proceeding, then the interest penalty on the amount determined to be due
hereunder shall be calculated in accordance with the provisions set forth
above unless otherwise determined by such proceedings. If a debtor party
advances payment of any amount it is contesting, and proves to be correct
in its contestation, either in whole or in part, the other party shall
reimburse the debtor party for any such excess payment made plus interest
on the excess amount calculated in accordance with this Article.
E. Interest penalties arising out of the application of this Article that are
$100 or less from any party shall be waived unless there is a pattern of
late payments consisting of three or more items over the course of any
12-month period.
Article XVI - Offset (BRMA 36C)
The Company and the Reinsurer shall have the right to offset any balance or
amounts due from one party to the other under the terms of this Contract. The
party asserting the right of offset may exercise such right any time whether the
balances due are on account of premiums or losses or otherwise.
Article XVII - Access to Records (BRMA 1D)
The Reinsurer or its designated representatives shall have access at any
reasonable time to all records of the Company which pertain in any way to this
reinsurance.
Article XVIII - Errors and Omissions (BRMA 14F)
Inadvertent delays, errors or omissions made in connection with this Contract or
any transaction hereunder shall not relieve either party from any liability
which would have attached had such delay, error or omission not occurred,
provided always that such error or omission is rectified as soon as possible
after discovery.
Article XIX - Taxes (BRMA 50B)
In consideration of the terms under which this Contract is issued, the Company
will not claim a deduction in respect of the premium hereon when making tax
returns, other than income or profits tax returns, to any state or territory of
the United States of America or the District of Columbia.
Article XX - Unearned Premium and Loss Reserves
A. If the Reinsurer is unauthorized in any state of the United States of
America or the District of Columbia or rated B+ or less by A.M. Best, the
Reinsurer agrees to fund its share of the Company's ceded unearned premium
and outstanding loss and loss adjustment expense reserves (including
incurred but not reported loss reserves) by:
1. Clean, irrevocable and unconditional letters of credit issued and
confirmed, if confirmation is required by the insurance regulatory
authorities involved, by a bank or banks meeting the NAIC Securities
Valuation Office credit standards for issuers of letters of credit
and acceptable to said insurance regulatory authorities; and/or
2. Escrow accounts for the benefit of the Company; and/or
3. Cash advances;
if, without such funding, a penalty would accrue to the Company on any
financial statement it is required to file with the insurance regulatory
authorities involved. The Reinsurer, at its sole option, may fund in other
than cash if its method and form of funding are acceptable to the
insurance regulatory authorities involved.
B. With regard to funding in whole or in part by letters of credit, it is
agreed that each letter of credit will be in a form acceptable to insurance
regulatory authorities involved, will be issued for a term of at least one
year and will include an "evergreen clause," which automatically extends
the term for at least one additional year at each expiration date unless
written notice of non-renewal is given to the Company not less than 30 days
prior to said expiration date. The Company and the Reinsurer further agree,
notwithstanding anything to the contrary in this Contract, that said
letters of credit may be drawn upon by the Company or its successors in
interest at any time, without diminution because of the insolvency of the
Company or the Reinsurer, but only for one or more of the following
purposes:
1. To reimburse itself for the Reinsurer's share of unearned premiums
returned to insureds on account of policy cancellations, unless paid
in cash by the Reinsurer;
2. To reimburse itself for the Reinsurer's share of losses and/or loss
adjustment expense paid under the terms of policies reinsured
hereunder, unless paid in cash by the Reinsurer;
3. To reimburse itself for the Reinsurer's share of any other amounts
claimed to be due hereunder, unless paid in cash by the Reinsurer;
4. To fund a cash account in an amount equal to the Reinsurer's share
of any ceded unearned premium and/or outstanding loss and loss
adjustment expense reserves (including incurred but not reported
loss reserves) funded by means of a letter of credit which is under
non-renewal notice, if said letter of credit has not been renewed or
replaced by the Reinsurer 10 days prior to its expiration date;
5. To refund to the Reinsurer any sum in excess of the actual amount
required to fund the Reinsurer's share of the Company's ceded
unearned premium and/or outstanding loss and loss adjustment expense
reserves (including incurred but not reported loss reserves), if so
requested by the Reinsurer.
In the event the amount drawn by the Company on any letter of credit is in
excess of the actual amount required for B(1), B(2) or B(4), or in the
case of B(3), the actual amount determined to be due, the Company shall
promptly return to the Reinsurer the excess amount so drawn.
Article XXI - Insolvency
A. In the event of the insolvency of one or more of the reinsured companies,
this reinsurance shall be payable directly to the company or to its
liquidator, receiver, conservator or statutory successor immediately upon
demand, with reasonable provision for verification, on the basis of the
liability of the company without diminution because of the insolvency of
the company or because the liquidator, receiver, conservator or statutory
successor of the company has failed to pay all or a portion of any claim.
It is agreed, however, that the liquidator, receiver, conservator or
statutory successor of the company shall give written notice to the
Reinsurer of the pendency of a claim against the company indicating the
policy or bond reinsured which claim would involve a possible liability on
the part of the Reinsurer within a reasonable time after such claim is
filed in the conservation or liquidation proceeding or in the receivership,
and that during the pendency of such claim, the Reinsurer may investigate
such claim and interpose, at its own expense, in the proceeding where such
claim is to be adjudicated, any defense or defenses that it may deem
available to the company or its liquidator, receiver, conservator or
statutory successor. The expense thus incurred by the Reinsurer shall be
chargeable, subject to the approval of the Court, against the company as
part of the expense of conservation or liquidation to the extent of a pro
rata share of the benefit which may accrue to the company solely as a
result of the defense undertaken by the Reinsurer.
B. Where two or more reinsurers are involved in the same claim and a majority
in interest elect to interpose defense to such claim, the expense shall be
apportioned in accordance with the terms of this Contract as though such
expense had been incurred by the company.
C. It is further understood and agreed that, in the event of the
insolvency of one or more of the reinsured companies, the
reinsurance under this Contract shall be payable directly by the
Reinsurer to the company or to its liquidator, receiver or
statutory successor, except as provided by Section 4118(a) of the
New York Insurance Law or except (1) where this Contract
specifically provides another payee of such reinsurance in the
event of the insolvency of the company or (2) where the Reinsurer
with the consent of the direct insured or insureds has assumed
such policy obligations of the company as direct obligations of
the Reinsurer to the payees under such policies and in
substitution for the obligations of the company to such payees.
Article XXII - Arbitration
A. As a condition precedent to any right of action hereunder, in the
event of any dispute or difference of opinion hereafter arising
with respect to this Contract, it is hereby mutually agreed that
such dispute or difference of opinion shall be submitted to
arbitration. One Arbiter shall be chosen by the Company, the
other by the Reinsurer, and an Umpire shall be chosen by the two
Arbiters before they enter upon arbitration, all of whom shall be
active or retired disinterested executive officers of insurance
or reinsurance companies or Lloyd's London Underwriters. In the
event that either party should fail to choose an Arbiter within
30 days following a written request by the other party to do so,
the requesting party may choose two Arbiters who shall in turn
choose an Umpire before entering upon arbitration. If the two
Arbiters fail to agree upon the selection of an Umpire within 30
days following their appointment, each Arbiter shall nominate
three candidates within 10 days thereafter, two of whom the other
shall decline, and the decision shall be made by drawing lots.
B. Each party shall present its case to the Arbiters within 30 days following
the date of appointment of the Umpire. The Arbiters shall consider this
Contract as an honorable engagement rather than merely as a legal
obligation and they are relieved of all judicial formalities and may
abstain from following the strict rules of law. The decision of the
Arbiters shall be final and binding on both parties; but failing to agree,
they shall call in the Umpire and the decision of the majority shall be
final and binding upon both parties. Judgment upon the final decision of
the Arbiters may be entered in any court of competent jurisdiction.
C. If more than one reinsurer is involved in the same dispute, all such
reinsurers shall constitute and act as one party for purposes of this
Article and communications shall be made by the Company to each of the
reinsurers constituting one party, provided, however, that nothing herein
shall impair the rights of such reinsurers to assert several, rather than
joint, defenses or claims, nor be construed as changing the liability of
the reinsurers participating under the terms of this Contract from several
to joint.
D. Each party shall bear the expense of its own Arbiter, and shall jointly
and equally bear with the other the expense of the Umpire and of the
arbitration. In the event that the two Arbiters are chosen by one party,
as above provided, the expense of the Arbiters, the Umpire and the
arbitration shall be equally divided between the two parties.
E. Any arbitration proceedings shall take place at Calabasas, California
unless otherwise mutually agreed upon by the parties to this Contract, but
notwithstanding the location of the arbitration, all proceedings pursuant
hereto shall be governed by the law of the state in which the Company has
its principal office.
Article XXIII - Service of Suit (BRMA 49C)
(Applicable if the Reinsurer is not domiciled in the United States of America,
and/or is not authorized in any State, Territory or District of the United
States where authorization is required by insurance regulatory authorities)
A. It is agreed that in the event the Reinsurer fails to pay any amount
claimed to be due hereunder, the Reinsurer, at the request of the Company,
will submit to the jurisdiction of a court of competent jurisdiction
within the United States. Nothing in this Article constitutes or should be
understood to constitute a waiver of the Reinsurer's rights to commence an
action in any court of competent jurisdiction in the United States, to
remove an action to a United States District Court, or to seek a transfer
of a case to another court as permitted by the laws of the United States
or of any state in the United States.
B. Further, pursuant to any statute of any state, territory or district of
the United States which makes provision therefor, the Reinsurer hereby
designates the party named in its Interests and Liabilities Agreement, or
if no party is named therein, the Superintendent, Commissioner or Director
of Insurance or other officer specified for that purpose in the statute,
or his successor or successors in office, as its true and lawful attorney
upon whom may be served any lawful process in any action, suit or
proceeding instituted by or on behalf of the Company or any beneficiary
hereunder arising out of this Contract.
Article XXIV - Agency Agreement
If more than one reinsured company is named as a party to this Contract, the
first named company shall be deemed the agent of the other reinsured companies
for purposes of sending or receiving notices required by the terms and
conditions of this Contract, and for purposes of remitting or receiving any
monies due any party.
Article XXV - Intermediary (BRMA 23A)
E. W. Blanch Co. is hereby recognized as the Intermediary negotiating this
Contract for all business hereunder. All communications (including but not
limited to notices, statements, premium, return premium, commissions, taxes,
losses, loss adjustment expense, salvages and loss settlements) relating thereto
shall be transmitted to the Company or the Reinsurer through E. W. Blanch Co.,
Reinsurance Services, 3500 West 80th Street, Minneapolis, Minnesota 55431.
Payments by the Company to the Intermediary shall be deemed to constitute
payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be
deemed to constitute payment to the Company only to the extent that such
payments are actually received by the Company.
In Witness Whereof, the Company by its duly authorized representative has
executed this Contract as of the date undermentioned at:
Calabasas, California, this _______ day of ________________________199___.
--------------------------------------------------
Condor Insurance Company
<PAGE>
Table of Contents
Article Page
I Classes of Business Reinsured 1
II Term 1
III Territory 2
IV Exclusions 3
V Retention and Limit 4
VI Assessments 5
VII Loss in Excess of Policy Limits/ECO 5
VIII Claims and Loss Adjustment Expense 6
IX Salvage and Subrogation 7
X Florida Hurricane Catastrophe Fund 7
XI Original Conditions 7
XII Sliding Scale Commission 8
XIII Reports and Remittances 9
XIV Loss Occurrence (NMA 2244/BRMA 27A) 10
XV Late Payments 11
XVI Offset (BRMA 36C) 13
XVII Access to Records (BRMA 1D) 13
XVIII Errors and Omissions (BRMA 14F) 13
XIX Taxes (BRMA 50B) 13
XX Unearned Premium and Loss Reserves 13
XXI Insolvency 15
XXII Arbitration 15
XXIII Service of Suit (BRMA 49C) 16
XXIV Agency Agreement 17
XXV Intermediary (BRMA 23A) 17
Quota Share Reinsurance Agreement
REINSURED: Amwest Surety Insurance Company Calabasas, California
REINSURER: Underwriters Reinsurance Company Calabasas, California
SUBJECT
BUSINESS: Business classified as Surety by Reinsured.
SUBJECT
LOSS: Subject Loss shall be defined as Loss, ALAE and
ULAE for losses with a discovery date during the
term of this agreement. "Losses Discovered"
shall be deemed to mean new losses reported on
or after the effective date and specifically
excludes any development of losses discovered by
the Company prior to inception relating to
business inforce as of July 1, 1998.
SUBJECT
PREMIUM: Unearned Premium as of June 30, 1998, PLUS Written
Premium during the Term for Subject Business,
TERM: July 1, 1998 to June 30, 1999.
LIMIT: 15.0% Quota ,hare of Subject Premium.
CEDING
COMMISSION: Provisional: 75.09"0 at 25,0% Loss and I AE Ratio.
Sliding- 1 for 1 to
Minimum: 67.0% at 33.0% Loss and LAE Ratio.
FUNDS
WITHHELD
ACCOUNT: The Funds Withheld Account (FWA) shall be established
and maintained by the Reinsured. The balance 'in the
FWA shall be calculated at follows:
100% of Ceded Subject Premium,
Less Ceding Commission,
Less Reinsurer Expense,
Less Ceded Paid Loss,
Plus Interest Credit
Interest shall be credited quarterly to the FWA
by the Reinsured at a rate of 1.5% multiplied by
the average daily balance in the FWA over the
quarter.
REINSURER
EXPENSE: Flat $400,000, payable in four installments at
October 1, 1998; December 31, 1998; March 31,
1999; and June 30, 1999. Reinsurer Expense is
payable in addition to the 15.0% of Subject
Premium.
EXCLUSIONS: 1. Inuring reinsurance which is uncollectable.
2. Others to conform to Excess Treaty.
ACCOUNTS&
RIEMITTANCES: Quarterly within 45 days, the Reinsured shall furnish
the following:
1. GNWPI on Subject Business.
2. Net Earned Premiums on Subject Business.
3. Ceded Subject Loss Outstanding.
4. Ceded Subject Loss Paid.
5. FWA balance.
Balances due either party will be payable
quarterly within 45 days. Ceded Subject Loss
shall first be paid from the FWA, and then from
the Reinsurer's own funds.
COMMUTATION: The Company may commute this agreement at any
time on or after December 31, 1998. As
consideration for commutation, the Reinsurer
shall release 100%, of the FWA back to the
Company. Commutation shall fully and finally
release the Reinsurer from all liability under
this agreement.
INSOLVENCY: In the event of the insolvency of the REINSURED,
this reinsurance shall be payable directly to the
REINSURED or to its liquidator. receiver, conservator,
or statutory successor on the basis of the liability of
the REINSURED without diminution because of the
insolvency of the REINSURED or because the liquidator,
receiver, conservator, or statutory successor of the
REINSURED has failed to pay all or a portion of a claim.
It is agreed, however, that the liquidator, receiver,
conservator, or statutory successor of the REINSURED
shall give written notice to the REINSURER of the
pendency of a claim against the REINSURED indicating
the policy insured which claim would involve a possible
liability on the part of the REINSURER within a
reasonable time after such claim is filed in the
conservation or liquidation proceeding or the
receivership, and that during the pendency of such a
claim, the REINSURER may investigate such claim and
interpose, at their own expense, in the proceeding where
such claim is to be adjudicated, any defense or
defenses that they may deem available to the REINSURED
or its liquidator, receiver, conservator, or statutory
successor. The expense thus incurred by the REINSURER
shall be chargeable, subject to the approval of the
court, against the REINSURED as part of the expense of
conservation or liquidation to the extent of a pro rata
share of the defense undertaken by the REINSURER.
URC SHARE: 100% of 15.0% Quota Share.
Agreed to Cede: Accepted by:
Steven P,. Kay Date Anthony L. Manzitto Date
Amwest Surety Insurance Company Underwriters Reinsurance Company
